What Did We See?
- U.S. Large Cap stocks, or the S&P 500 index, were up about 10.6% in Q1.
- The developed market of Japan was up about 18.1%.
- Europe and the U.K. were up about 9.7% and up about 3.6% respectively.
- Emerging Markets and Asia (Ex-Japan) were up about 2.4% each.
- Global fixed income returns ended the quarter from up about 0.8% (Italy) to down about 2.7% (Global Bonds)
Where Do We Stand?
- The 2023 market rally continued into 2024 on the hopes of rate cuts.
- Valuations remain very elevated versus historic averages while earnings have shown strength.
- The markets will likely remain focused on the Federal Reserve as the country awaits rate cuts.
- We remain in a position to weather any volatility with positions in Gold and Cash while looking to be more active in opportunities when they present themselves.
The debate over a hard landing or a soft landing for the US economy has been an obsession of market pundits for some time now. Is economic growth going to hold up or turn lower? Will the labor market collapse under the weight of inflation? Is the Fed making too many mistakes?
During Q1 the Fed continued to attempt to stabilize inflation while supporting the economy. At the same time, markets continued to rally as if inflation was no longer a concern. These two opposing forces cannot last forever. Resilient economic data pushed investors past the malaise of the most widely anticipated recession that never came. US GDP remained in expansionary mode while macroeconomic data around the world further supported the prospects of a soft landing.
To be fair, evidence of market volatility driven by inflationary pressures, supply chain issues and global dynamics did exist. However, markets reacted with resilience and were able to rebound from any losses. Good corporate earnings, continued support from central banks and general optimism have helped drive the narrative that the economic recovery is on solid footing.
So where to from here?
The strong performance of equites probably has traders wondering if we can expect to see some consolidation soon. Many stocks seem rather extended at this point. Recent market performance has been driven by a handful of stocks while many other stocks have been left behind. We would like to see a furthering of breadth (i.e.: more stocks heading in the same direction) before we were to buy into the idea that we are in a brand new bull market. While the economic performance through the volatility has been impressive, we would still warrant caution in blindly chasing returns.
Follow the Earnings
Earnings growth in the S&P 500 since the recent market low (Oct. 11, 2023) has been focused in seven stocks. In aggregate, earnings have grown for the other 493 stocks to the tune of 25% since that date. When you include the “Magnificent 7” stocks that number rises to almost 45%! However, recently that trend has shown signs of a reversal with expectations of that trend continuing.
The Magnificent 7 stocks are expected to slow their earnings growth through the rest of the year. Meanwhile the “other stocks” are actually starting to grow their earnings. By the fourth quarter of 2024, the expectation is these other 493 stocks will be growing faster than the Mag 7. Further helping this is the fact that manufacturing in the US looks to begin expanding again after shrinking for the past few years. This will certainly help the non-Tech portions of the market.
Follow the Conflicts
Geopolitics continued to affect market sentiment in Q1. The continued pressured on global supply chains from the war in Ukraine to the Houthis attacking shipping in the Red Sea certainly have been disruptive. As well, investors have had to remain vigilant in respect to US-China relations and continued Brexit negotiations. And, of course, the conflict in Gaza continues to have a potential to ignite a regional Nevertheless, markets have remained rather sanguine to these potential disruptors. As always is the case with Geopolitics, it doesn’t matter until it doe matter. Meaning, most markets that aren’t directly involved tend to shrug off the negative consequences until they no longer can pretend the
Follow the Bonds
Fixed income portfolios have remained a challenge for investors. As inflation continues to remain sticky, the Federal Reserve has been forced to backpedal a bit on its dovish stance on forward interest rates. Markets reacted in kind driving the number of expected cuts in 2024 from a high of 7 cuts to no more than 3 cuts. The expectation has remained that any interest rate cuts would begin in the summer of 2024. However, even that expectation may be dashed as recent economic data could lead the Federal Reserve to Reserve to hold on to higher rates for a longer period. The net result of these new expectations was a lower bond market while also pushing rate sensitive areas like Real Estate to lower levels.
Hold on for Longer
In uncertain market environments it’s always best to exude patience. As is often the case, the potential negative influences on the market are numerous right now. From the Fed not lowering rates, to consumer and earnings slowdowns to Geopolitical concerns, there is always something that the market may react negatively to. However, through time, markets have always found a way to move past the negative.
It has been a nice start to the new year as equity valuations find new higher levels and some markets appear “priced to perfection”. Diversification within portfolios will be key to the remainder of the year as the U.S. moves towards election season and all the volatility that usually brings.
If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.
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