Quarterly Market Review: Q1 2024
Investing PlanningCogentBlue's evidence-driven investing portfolios are strategically invested with a focus on long-term performance objectives. Portfolio allocations and investments are not adjusted in response to market news or economic events; however, we evaluate and report on market and economic conditions to provide our investors with perspective and to put portfolio performance in proper context.
Global stocks had an impressive start to the year, returning 8% in the first quarter. The prospect of an AI-driven productivity boom drove stocks higher, especially in the US, outweighing areas of uncertainty such as higher-for-longer interest rates and upcoming US elections. Japan made headlines as the Nikkei reached new record highs for the first time since 1989. And major US indices, including the Russell 3000 and S&P 500 Index, ended the quarter at all-time highs.
IT and Communication Services stocks led the stock market gains but it wasn’t concentrated in the “Magnificent 7” names that led the US market last year. While Nvidia, Microsoft, Meta and Amazon all contributed to market returns, both Apple and Tesla detracted. REITs were the only sector to post negative returns for the quarter, falling after a strong fourth quarter last year.
Globally, small caps trailed large caps. However, value and profitability offered a ballast against the negative size premium, as value stocks and stocks with higher profitability generally outperformed their counterparts.
What is Keeping the American Economy So Resilient?
The U.S. grew by 2.5% in 20231 , after accounting for the higher cost of goods and services, defying estimates of flat growth or even a recession.2 Notably, the eurozone, U.K., Canada and Japan are all close to or currently in a recession. Meanwhile, the Atlanta Fed estimates the U.S. grew at an annualized pace of 2.8% in the first quarter of 2024.3 How has the U.S. managed to escape the same recessionary fate?
For one, American households, through fixed-rate mortgages and excess savings built up during the pandemic, have been more insulated from higher rates. Public investments in clean energy and infrastructure have spurred economic activity. And legal immigration has boosted the labor force while the entire workforce has simultaneously become more productive.
The future is not without risks, however: prices for office space are adjusting to the era of remote work, leading to risks in commercial loans, bank balance sheets and municipal tax revenues, especially in big cities. For consumers, higher rates have already led to an uptick in credit card and auto loan defaults. One of the biggest risks is the growing deficit. The U.S. has been borrowing to fund spending, which could keep upward pressure on interest rates. Neither political party has put forth a cohesive plan to balance the budget.
While the deficit poses a significant risk, overall, the American economy has shown remarkable resilience in the face of uncertainty and should be poised for continued growth.
Economic and Market Snapshot
Global stock markets, led by large, tech-oriented firms in the U.S., continued their climb. Valuations for the Magnificent Seven stocks have risen fast, but fortunately the rest of the market has valuations much closer to their historical averages.*
Bond markets have remained resilient. Bond spreads, or the additional interest a company must pay above a similar Treasury bond, have tightened considerably for higher rated U.S. companies, helping to buoy company balance sheets
Where do markets go from here?
Corporate profits. Analysts estimate earnings growth for the S&P 500 at over 11% this year. However, the downward-sloping yield curve indicates that the bond market expects interest rates to decline in the near future, which would be more indicative of weakening economic fundamentals.
Stock share prices. Stock buybacks, where a company uses a portion of profits to repurchase its own shares, are likely to decline due to recession fears, a new tax on buybacks and higher financing costs. Stock buybacks have historically been a tailwind to stock returns.
Inflation fears. While investors have many reasons to be less than optimistic as most central banks around the globe continue to engage in more restrictive monetary policy to fight inflation, valuations generally already reflect that concern.
What are the investment planning implications?
Expect volatility. The surge in deficit spending at a time of overall growth in the economy is likely to shape a fierce debate on Capitol Hill about the nation's fiscal policies as lawmakers face a potential government shutdown early next year and make choices over trillions of dollars in expiring tax cuts.
Be prepared for lower returns from stocks. Given the cost projections and expected growth of the budget deficits, research on historical environments suggests economic growth could be sluggish. This combined with historically high stock market valuations (particularly in the U.S.) may translate to lower forward-looking stock returns than what we’ve experienced historically.
Take the appropriate amount of risk. If you are concerned about the potential for losses in your portfolio, consider reducing your exposure to stocks. Given the rally in stock markets, many clients have plans that are “overfunded” and can be equally successful with less invested in stocks. Ask your advisor how your plan might change with less invested in stocks.
Investing should be done with a plan. Hope is not an investment strategy. We are here to help - reach out today!
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For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based upon third party data, which may become outdated or otherwise superseded
without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the
management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Neither
the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.
*The Magnificent Seven stocks include Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, and Tesla.
1
Bureau of Economic Analysis. Gross Domestic Product, Fourth Quarter and Year 2023
(Third Estimate). March 28, 2024.
2
S&P Global Ratings. Economic Research: Global Macro Update: Surprising Resilience
Unlikely To Last Into 2023. Nov. 30, 2022.
3
Atlanta Fed. GDPNow estimate as of April 4, 2024.
4
Philadelphia Fed. First Quarter 2024 Survey of Professional Forecasters. Feb. 9, 2024.
5
The Economist. America’s economy has escaped a hard landing. March 14, 2024.
6
Federal Reserve’s Powell holds briefing after interest rate meeting as inflation. March 20, 2024.
7
U.S. Bureau of Labor Statistics.
8
Wall Street Journal. The Cost of Car Ownership Is Getting Painful. Feb. 13, 2024.
9
Forbes. The Slippery Slope Of The Fed’s Shrinking Balance Sheet. Feb. 3, 2023.
10Congressional Budget Office: The Budget and Economic Outlook: 2023 to 2033. Feb. 2023.
11Apollo Academy. $10 Trillion in US Treasuries Coming to the Market in 2024. Feb. 3, 2024.
12Cecchetti, Stephen G. and Cecchetti, Stephen G. and Mohanty, Madhusudan S. and
Zampolli, Fabrizio, The Real Effects of Debt (September 1, 2011). BIS Working Paper No.
352, Available at SSRN: https://ssrn.com/abstract=1946170
13Apollo Academy. Work from Home Is Here to Stay. Jan. 29, 2024.
14Bloomberg. US Commercial Property Foreclosures Spike in January. Feb. 22, 2024.
15Apollo Academy. Outlook for Banks. Feb. 9, 2024.
16Wall Street Journal. The Cost of Car Ownership Is Getting Painful. Feb. 13, 2024.
17Wall Street Journal. U.S. Home Sales Jumped 9.5% in February. March 21, 2024.
18Apollo Academy. Probability of a Fiscal Accident Is Rising. Feb. 18, 2024.
Major Asset Class Returns: The index representation for the Major Asset Class Returns is as
follows: U.S. stocks are represented by the Russell 3000 Index, international stocks by the
MSCI World ex U.S. IMI Index, emerging markets by the MSCI Emerging Markets IMI Index, U.S.
government bonds by the Bloomberg Government Intermediate Total Return Index, and global
bonds by the FTSE World Government Bond 1-5 Year Index. Past performance is not a guarantee
of future results. Indexes are unmanaged baskets of securities that are not available for direct
investment by investors. Index performance does not reflect the expenses associated with the
management of an actual portfolio. Information from sources deemed to be reliable, but its
accuracy cannot be guaranteed.
Key Economic Indicators: Sources: Bureau of Economic Analysis (BEA) for real GDP growth. Real
GDP is the annual rate of change of real gross domestic product, seasonally adjusted. Bureau
of Labor Statistics (BLS) for core CPI. The core consumer price index (CPI) is the annual rate of
change, seasonally adjusted, and excludes food and energy. Consumer sentiment is from the
University of Michigan’s consumer sentiment index. Unemployment rate is reported by the BLS,
and jobs added is based on nonfarm payroll employment reported by the BLS. Retrieved from
FRED, Federal Reserve Bank of St. Louis. For all indicators, the boxed number reflects the latest
reading, and the line above the box shows the change since the last update. The shaded areas
reflect normal readings compared to history (based on the 25th-75th percentile of historical
measures), while areas outside the dark blue reflect more extreme readings compared to history.
The ranges are based on the percentile values of historical readings for each economic figure.
The lowest number reflects the 5th percentile value, the bottom of the blue range reflects the
25th percentile, the top of the blue range is the 75th percentile, and the highest value reflects
the 95th percentile. All ranges are based on the full period available. To account for population
and employment, the ranges presented for jobs added are based on the percent change in
employment numbers, using December 2023 as the base year.