Investment Outlook, March 2024

March 28, 2024

After the 2023 year-end rally, the equity market strength has continued into 2024; the S&P 500 has hit all-time highs, surpassing the levels we saw at the beginning of 2022. We are excited to see the market at these levels after two years of volatile markets, and we don’t see new highs as a risk. A healthy market is meant to march continually higher and higher. As we’ve shared in discussions and notes, the market strength we witnessed in 2023 was primarily led by the tech sector rebounding from its overreaction to the downside in 2022. Excitement for artificial intelligence is now additionally propelling the sector and the “Magnificent 7” even further in 2024. More importantly, Sectors that failed to participate in last year’s market rebound are now gaining ground as optimism percolates through the broader market. With interest rate cuts still expected at some point this year and continued economic stability, even more market highs could be coming this year.

Both January and February brought unexpectedly higher CPI data. This, coupled with solid employment data, has led the Fed to delay anticipated rate cuts and stick to its message of waiting to see further data before it begins to lower its policy rate. As we anticipated at year-end, prices are encountering the bumpy “last mile” in moving inflation toward the Fed’s 2% target. On the other hand, employment data is starting to give the Fed pause; if the labor market weakens too much, the Fed will be racing to cut rates to maintain the health of the economy. Recent data shows quit rates declining and job openings down substantially from the 2022 highs. The headline unemployment rate has increased slightly from its lows, but this is largely the result of increased participation in the labor force from a growing supply of workers. Both inflation and employment are the key indicators determining when the Federal Reserve begins to cut rates. At its most recent meeting, the Federal Open Market Committee confirmed that it still expects to reduce interest rates three times this year.

In response, the bond market has retreated a bit. Since bottoming toward the end of 2023, yields have moved higher again, awaiting more visibility on the timing of the Fed’s first move. Contrary to 2022, however, equities have not reacted negatively to higher yields, pushing higher, instead, on the current economic conditions and earnings trends. Unlike rallies the past two years, Chair Powell has not talked down this market so far. Throughout the period of rising policy rates, we saw Fed Chair Powell and other Fed Board members publicly talk down several market rallies, relaying that there was still work to be done keeping financial conditions tight to contain prices. Today, speculative assets like various cryptocurrencies and meme stocks are skyrocketing, and the euphoria around artificial intelligence remains undeterred. Silence from the Fed may be acknowledging that the wealth effect from a strong market supports consumer spending and allows the Fed to maintain higher rates for longer.

We believe a recession has been avoided – or is already behind us, as we have noted before. 2024 may bring early economic cycle strength, and we are continuing to position portfolios to take advantage of this more robust economic outlook, with defensive protection in sectors that have been market underperformers against the broader market, such as Staples and Healthcare. With longer-dated bond yields above their lows, we are also adding quality fixed income to bond portfolios, often finding 4% coupons on taxable bonds to lock in income. Despite the encouraging start to this year, we believe that extended valuations and the presidential cycle will likely introduce market volatility before the year is over. We will take advantage of any opportunities that volatility brings, and we believe our long-term investing strategy will be rewarded by year-end.

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