Quarterly Newsletter

The strong stock market returns of 2023 continued into 2024, with the S&P 500® Index rising 7.1% through the first two months of the year. As of mid-March, these gains held steady, with the S&P 500 near all-time highs, while the tech-heavy NASDAQ was also trading near its peak. So far this year, the tech mega-caps dubbed the “Magnificent Seven,” which powered index returns in 2023, have lost some luster, although market advances continue to be fueled by a smaller number of technology-centric stocks. Meanwhile, the broader market has shown improved strength. For instance, the strong February return saw more than 70% of the S&P 500 stocks positive while small and mid-sized stocks advanced in line with the large-cap indices, even as they face potentially greater earnings pressures from high interest rates and input costs.

The bond market was relatively calm for the bulk of the quarter, even with the shifting expectations for Federal Reserve easing. The yield on the benchmark U.S. Treasury 10-year traded in a narrow range, while the yield curve remained stubbornly inverted (shorter bonds out-yielding longer ones). The latest economic report as of this writing was the employment report issued by the Labor Department on March 8. Moderate job growth was balanced by an increase in unemployment and a slowing of wage growth, keeping expectations in place for incremental Fed rate cuts starting this summer. The subsequent inflation report added some ambiguity by coming in a tick higher than expected at 3.2%, suggesting that the Federal Reserve’s efforts to hit their targeted 2% may prove more difficult than hoped. The immediate reaction from the stock market was benign, but should inflation hit a stubborn patch, we can expect a more meaningful response from both the Fed and the market.

Despite the strong market, the moderation of inflation over the past year, and unemployment near a 50-year low, February saw an unexpected decline in consumer confidence. Some of this can be attributed to election stress as prospects for a November presidential election featuring two unpopular candidates came into focus. Steady gloomy news from two overseas war zones was an additional cloud. The strong returns of late 2023 were powered by the prospect of numerous Federal Reserve rate cuts, once seen as beginning as early as March. Consensus has moved to our level of skepticism, but the market has plowed ahead regardless, buoyed, it seems, by the backdrop of a stronger-than-expected economy and the willingness to accept a slower and more cautious Fed. The late February inflation print kept the trend in place as the closely observed personal consumption expenditure (PCE) numbers fell right in line with expectations.

One trend to keep an eye on is the softening of consumer spending, as seen in a broad first-quarter decline reported by shipping and delivery companies. While strong employment numbers continue to support economic growth, much of the world is showing less robust results, and we are not immune to a slowdown. Behind the high cost of borrowing, the housing market has been sluggish, as has big-ticket consumer spending, including cars. However, any Federal Reserve rate cuts should quickly be reflected in lower mortgage and borrowing rates, which could trigger a buying revival considering the pent-up demand. Business spending has also been flat so far this year, except for productivity-enhancing technology as seen in the enthusiastic adoption of artificial intelligence advancements. Slackening demand for consumer goods has led to price declines in many areas, leaving inflation now largely centered on the cost of services.

While the valuations of favored stocks are well below the feverish pitch we saw in the tech boom of the late 1990s, the excitement over the prospects of artificial intelligence and the rosy earnings projections for the year ahead warrant some careful comparisons. Today is quite different in how business momentum and real earnings have boosted the highest flying stocks. At the same time, we always have an eye on risk and see some mounting evidence that expectations may exceed reality. The remainder of 2024 will likely be dominated by an increasing focus on the election. This anxiety may be balanced by expected rate cuts.

The International Monetary Fund (IMF) has projected global growth in 2024 at 3.1%, despite European economies teetering on recession and slowing growth in China. Inflation remains a challenge not just in the U.S. but throughout the world, with the IMF projecting a global rate for 2024 of 5.8%. This is just one more indication of how the U.S. economy remains the strongest in the world and why its capital markets continue to produce attractive investment opportunities.