Quarterly Update

The first quarter (Q1) of 2024 seemed to go by fast while yielding good performance from the stock market. Positive returns were broader based compared with recent quarters, and that was good to see. The Fed, interest rates, and economic projections played a role again during the quarter but, as with stock performance, the surprises were generally positive.

Here’s a roundup of how major markets have performed so far this year:

• US Large Cap Stocks: up 10.6%
• US Small Cap Stocks: up 5%
• US Core Bonds: down 0.7%
• Developed Foreign Markets: up 6%
• Emerging Markets: up 2.2%

As I just mentioned, solid performance was more prevalent during the quarter than has been typical lately. Popular stocks like Nvidia, Meta (Facebook), and Netflix had another banner quarter, up 82%, 37%, and 25%, respectively, but almost all other sectors performed well. Only Real Estate was negative, down by less than 1%. Energy, Communication Services, and Financial Services led the way, returning 13.5%, 12.7%, and 12.4%, respectively. Looking at stock styles, “Growth” again beat “Value” by returning nearly 13% during Q1 to the latter’s 8%. Overseas, European indices were up around 5% or so while Japan doubled that.

Core bonds were flat or down less than 1% depending on the index, while longer-term bonds were down more, perhaps 5% again depending on the index. Riskier types of fixed income like preferred stocks were up around 5% and high yield (or “junk”) bonds were up 1-2%. Cash performed well compared to bonds, up 1% or so. As has been the case for a while now, this lagging performance from bonds was caused largely by the shifting sands of market expectations about the economy and when and how much the Federal Reserve may lower interest rates.

We began 2024 with most investors anticipating the Fed would lower rates three times this year, perhaps beginning this Spring but definitely by Summer. The thinking was that inflation would continue to fall and slowing economic growth would force the Fed’s hand. Lower rates help stock and bond prices, so these expectations provided a tailwind for both as we entered Q1. However, inflation remained elevated during the quarter and the economy continued to surprise to the upside. By March even the Fed had raised its growth projections and this added fuel to stock prices while putting a damper on bond prices. The 10yr Treasury rate, a key benchmark, ended the quarter at 4.2% (and is nearly 4.4% as of this writing), up from about 3.9% as the quarter began. Taken together, higher bond yields responding to a strong economy is a good problem to have since it helps stock prices, at least for a while, but it’s not what the bond market wants to see.

Continuing the run of upside surprises during the quarter was when the list of Leading Economic Indicators from the Conference Board turned positive after 23 straight months of negative readings. The LEI is a composite of ten indicators and that many months negative had always coincided with a formally declared recession. That the LEI finally showed a positive reading as Q1 ended and without us falling into a technical recession was noteworthy. Only time will tell if we continue the positive trend, but news like this certainly helped stocks during the quarter.

However, some news reported as positive can also have a negative side. For example, the University of Michigan’s Consumer Sentiment Index section related to expectations for stock prices shows that typical investors are more bullish then they’ve been in nearly three years. It’s great to see consumers expressing more optimism than a year ago because that bodes well for the economy. The problem for stocks is that prices can rise in the short-term as investing gets popular again, especially given the interest in AI, but the rush of new money into the system sets up more volatility. This also perpetuates a cycle that often leaves late arrivals feeling left out of the party. That won’t be us because we’re more disciplined and deliberate, and we respect the long-term nature of investing, but it will be others.

Along these lines, all major stock indices ended Q1 in “overbought” territory, indicating that prices are at least one standard deviation higher than their 50-day and 200-day moving averages. The S&P 500, the index most commonly used to represent the US stock market, ended the quarter on a run of over 50 days overbought. Stock prices can and often do remain higher like this for a while, but the longer they do the larger any pullback could be. Remember that corrections can happen in the context of a longer-term bull market – they reset expectations and clean house a bit, so it’s best to be prepared for that in the weeks and months ahead. I’m not trying to be a downer after a quarter of otherwise good news, just realistic.

Planning for volatility is mental but also practical. You can rebalance your portfolio by selling portions of what’s been doing well and buying others that are still good quality and appropriate to own but have been lagging. I’m doing this for you if I’m managing your portfolio, of course, but rebalancing is important and often counterintuitive because doing so usually means selling amid otherwise good market conditions. Rebalancing can also help generate cash for near-term spending needs, so let me know of anything that might require dipping into your investment portfolio.

Have questions? Ask us. We can help.