By: Paul Morrone
The year couldn’t have started better for equity investors. Global equities continued the 2023 rally and US markets soared during the first quarter to notch multiple new all-time highs in early 2024. That’s great news for investors’ bottom lines and once again gives hope to many who have felt that they have been getting battered year-over-year between the COVID and Fed induced recession of 2022. There is a lot to like about where markets currently are, and what could be in the future as the rest of the year unfolds.
Before we get too excited, however, we want to keep expectations in check because as we all know, investing in the stock market is not without risk and several headwinds still persist that threaten to slow things down. In fact, from a technical perspective, it would not be unreasonable to expect a 5%-10% pullback from current levels given how quickly things have run up so far this year. We said something similar last quarter, and at the risk of sounding like the boy who cried wolf, will continue to view this as a very real short-term risk. But technical analysis does not tell the whole story, and fundamentals will continue to drive investors’ expectations for long-term rates of return. This means factoring in risk, both known and unknown, to determine where we go from here.
What we know is clear, and as far as where we’re at today, there isn’t much to say that hasn’t already been said. The main themes from the past several quarters remain top concerns for the foreseeable future as investors and financial markets continue to digest real-time economic data related to inflation, and, of course, whatever Fed Chair Jay Powell has to say. This has been, and will remain, a paramount concern for investors. We also know we aren’t out of the woods yet, as the inflation report released April 10th still indicates that inflation is higher than policymakers’ targets. In fact, this is the third straight month of month-over-month inflation increase, effectively eliminating the chance of a rate cut in June and reducing the chance for multiple rate cuts this year.
What is unknown, however, is what effect things like geopolitical tensions or a polarizing presidential election can have on the investors’ confidence in the future. From a historical perspective, these tend to be more headline risks than the cause of systemic market failures, but the future is inherently uncertain.
Rather than pose a bunch of rhetorical questions, we wanted to recap and update some of the themes we mentioned during our 4Q23 review to compare and contrast where we were three months ago versus today.
Mega Cap Tech Stocks: The magnificent 7 have now been demoted to the fabulous 5 (it’s hard to keep up with these cute names!) as Apple and Tesla have struggled so far this year. That being said, Nivida has since established itself as arguably the most important name in equity markets as demand for all things AI continues to power its shares to astronomical heights. Surely, there will be more to come here.
Broadening of Equity Rally: A key trend that we continue to track closely is the broadening of the stock market rally outside of the most popular household names. This could indicate that the bull has further to run. Mid cap stocks were late to the party, and it took until March of 2024 until a new high was logged in this asset class. Their small cap cousins, however, have yet to eclipse the previous market highs set in October of 2021. But the trends for the extended market remain favorable as they, too, are starting to become en vogue as investors view their relatively low valuations as attractive when compared to their large-cap counterparts. This is great news for diversified investors who have been waiting to see their stock portfolios keep pace with the white-hot S&P 500, which continues to be fueled by the tech sector.
Interest Rates: Going back a few quarters, we were not confident that we would see any Fed rate cuts during 2024. The further we move into the year, the more likely it is that this may ultimately be the outcome. As recently as last week, we’re hearing members of the Federal Open Market Committee (FOMC) speak publicly about the potential that there may be no rate cutes before the end of the year, which is in stark contrast to the predictions made by the majority of wall street who anticipated 4-5 rate cuts in 2024. This is further complicated by the most recent inflation report (4/10/24), referenced earlier, that continues to challenge the probability of rate cuts at all this year. The continued resilience of the economy, American consumer and labor market reinforce that tighter monetary policy may need to continue into 2025 to curtail inflation to the Fed’s liking.
Effective long-term investing is about deferred gratification, and as much as we like to celebrate the wins and mourn the losses, we know that time heals all wounds. The first quarter of 2024 brought the long-term mentality back into focus and, once again, rewarded those who have been patient and disciplined through the past several years. Admittedly, this was not an easy task as the early 2020s have so far been fraught with uncertainty, volatility and even panic. Regardless of what is going on in the world or in financial markets, remember, it’s not timing the market, it’s time in the market.
Speaking of wins, how ‘bout them Huskies!
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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