Market Update April 17, 2024
Stocks kicked off the new year just like they ended the last one, continuing their steady climb that began in late October. At this point it would appear the Fed has achieved the unlikely and navigated a soft landing for the economy. A growing economy with moderating inflation raises expectations for strong growth of corporate earnings. Furthermore, hopes were high to start the year that the Federal Reserve would implement a series of interest rate cuts this year, providing further stimulus to the economy and profits. Even as inflation leveled off sooner than expected and hopes faded over the degree of interest rate reductions, stocks still managed to climb through the end of the quarter. Large domestic stocks as measured by the Standard & Poor’s 500 were up 10.6% in the first quarter. Foreign stocks were also positive with the MSCI EAFE index of established foreign market stocks up 5.8% and the MSCI Emerging Markets index up 2.4%. Bonds were subdued by the waning expectation of lower interest rates and fell 0.8% as measured by the Bloomberg US Aggregate index.
The start to the second quarter has been less kind to domestic stocks and bonds alike as a third consecutive report on inflation came in a little stronger than expected. The market’s hopes for a series of interest rate cuts by the Fed have been greatly dashed at this point. The stronger inflation reports have caused bond yields to rise. The good news is that bond yields are nearly as attractive now as they were when they peaked last fall. The bad news is that the rise has, for the time, weighed down both stock and bond prices. Bond prices and yields have an inverse relationship, moving in opposite direction.
This pause in the climb of stocks should be viewed by investors as a good thing. Prices cannot go straight up forever, and the rally we have seen since last fall has been incredible. Sideways action in essence allows stocks time to digest their gains as earnings catch up to prices. Recent research by Raymond James has shown that stocks historically have gone on to have a very positive return over the remainder of the year following a very strong first quarter. Their research also showed that stock returns on these occasions were positive 85% of the time over the final three quarters of the year. Pullbacks have historically been fairly modest, averaging just under 10%.
Gold has been defying the laws of gravity recently, especially when considering the current backdrop. Normally, rising bond yields and a strong US Dollar weigh on gold prices. Not this time. Instead of falling as one might expect, the price of gold has consistently hit new all-time highs over the past month and a half. Demand has been driven by buying from central banks, in particular China’s. It was surprising that gold did not give back some of its gains last week when the stronger than expected CPI report on inflation led to a jump in both bond yields and the US Dollar. Silver has also risen sharply this year, providing another ballast to broadly diversified portfolios.
A lot of the excitement in domestic stocks over the past six months has centered on artificial intelligence. The technology sector is the first beneficiary as other corporations invest in the technology sector’s products and services to improve their own operating efficiency. These non-technology companies then become a later beneficiary of the new technology. It will be interesting to see how things unfold and whether or not this is the beginning of a new profitability cycle like we saw through the widespread adoption of the Internet in the late 1990’s.
Do not hesitate to reach out to me with any questions you may have or if we can help you with anything. We wish you an enjoyable spring.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged capitalization-weighted index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The Dow Jones Industrial Average index covers 30 major NYSE industrial companies. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Note that bond prices rise when yields fall, and vice versa, due to the inverse relationship between bond prices and yields. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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