Stocks extended their 2023 recovery rally during the first quarter of the year with the S&P 500 index up by 10.16%, the best first quarter since 2019.  Several of the big tech stocks continued their upward momentum led by chip maker Nvidia, which was up about 80% for the quarter and META (Facebook) up nearly 40%.  Unlike last year, all mega-cap stocks did not fare so well.  Tesla fell nearly 30% in the first quarter and Apple was down by over 10%.  The S&P equal-weight index, where each of the 500 component companies represents roughly 0.20% of the index, performed well during the first quarter with a 7.34% gain, but still trailed the market weighted index by almost 3%.  Small cap stocks as represented by the Russell 200 index were up 4.78%, trailing the S&P 500 by a considerable margin.

The economy continued to chug along, but not at a pace that brought inflation fears to the fore.  The labor market showed continued strength throughout its first quarter’s readings with the most recent unemployment rate published for February at 3.9%, a historically low level. While unemployment rates were low, the pace of wage increases slowed, especially when compared to the gains of the post-pandemic years.  This bodes well for inflation not getting too overheated.  All of this led the market to believe that the Fed will start lowering rates beginning early this summer and continue with several quarter-point rate decreases by the end of this year. 

A lot of what concerns investors and is being expressed by many of my clients is centered around the election in November.  I expect that as the campaign for the Oval Office heats up, neither major party candidate will propose new policies that will endanger the wealth held in retirement plans.  No matter the outcome of the presidential race, Congress still weighs in on much of the tax and economic policy and Partisan dysfunction often keeps legislative changes, especially radical ones, from moving forward. So, while I am concerned about civil unrest, I’m not sure it will have long-term consequences for companies or for the markets, which held steady or rose during the 2020 protests and the January 2021 riot at the Capitol.

The war in Ukraine has been ongoing for over 2 years and the Israel-Gaza war for over 6 months and yet despite these tragic conflicts, U.S. stock markets have reached all-time highs. While these conflicts are front and center in the news each day, our domestic day-to-day economic life has not really been impacted and I expect companies to continue to report solid earnings when results for the past quarter come out over the next few weeks. Looming larger are the geopolitical stresses with China as well as the strength of any economic recovery in China.  Both the Republicans’ and Democrats’ presumptive nominees are taking a hard stance on China trade, although U.S. Treasury Secretary Janet Yellin has been active in trying to tone down the trade rhetoric as the Chinese, European and the U.S. economies are still interdependent.

The past quarter saw some movement in the fixed income markets, but they basically ended the quarter where they started.  That means there are still attractive investment-grade corporate bonds and treasuries that are all providing returns higher than the rate of inflation. Bond traders seem to have lowered their expectations for the pace of rate cuts as the steep fall in year-on-year inflation numbers experienced in 2023 did not continue through the first quarter of 2024.

Many economists and Wall Street strategists seem sanguine about the likelihood of avoiding a recession and expect the Fed to start reducing rates this summer and continue throughout the year.  As the saying “don’t fight the Fed” suggests, lowering rates is usually good for the markets. However, given the rally over the last 15 months, perhaps some of the market gains you would expect under those conditions have already been realized.  I will continue to look for signs of FOMO (fear of missing out) and complacency and will adjust exposure through equity hedges and/or sector rotation accordingly. 

Should you have any questions about the attached report, this email, your portfolio, or anything else related to your financial life, my line is always open.

Best regards,

Steve