In this latest installment of our newsletter, we share our observations of the markets and the economy in the first quarter of 2024. Click here to go to the full report on our website. Following are the highlights:
- The stock market carried its strong momentum from late 2023 into the first quarter of 2024, driving most equity market indices to record highs.
- The S&P 500 Index posted a 10.6% total return for the first quarter, its best first quarter since 2019. The index peaked at 5,253 late in the quarter, a level which many analysts had predicted might not be reached until the end of 2024.
- The stock market was bolstered by the combination of a resilient U.S. economy, solid corporate earnings, continued strong momentum in the tech sector, and a broadening of the rally into sectors like financial, energy, and industrials, which had been largely left behind in last year’s rally.
- The bond market reversed gains from the fourth quarter of 2023, posting a negative 0.8% total return in Q1 2024, as a slight increase in interest rates caused bond prices to fall.
- The Federal Reserve held its benchmark Fed Funds rate steady at 5.25% – 5.5% during the first quarter, but benchmark Treasury yields began to tick higher in March, with the 10-year Treasury yield notching a year-to-date high of 4.3%, as expectations for significant rate cuts in the first half of 2024 began to fade.
- The Fed’s cautious stance on cutting rates early in 2024 came after two consecutive elevated inflation reports in January and February. The Consumer Price Index, or CPI, rose 3.1% year-over-year in January and 3.2% in February, exceeding expectations. Note: The March CPI reading came out after quarter-end and also surprised to the upside, posting a 3.5% year-over-year increase. Core CPI, which excludes volatile food and energy prices, also remained elevated at 3.8% in March, matching its 3.8% reading in February.
- Absent a meaningful reversal in the core inflation rate to a level closer to the Fed’s target 2% rate, it seems likely that the Fed will remain cautious about cutting interest rates until at least the latter part of 2024.
- Overall, the U.S. economy has remained remarkably resilient, characterized by continued low unemployment, strong GDP growth, and solid corporate earnings.
- The U.S. unemployment rate fell to 3.8% in March from 3.9% in February, remaining consistently in the sub-4% range as it has for the past 25 months.
- U.S. GDP grew at an annualized rate of 3.4% in the fourth quarter of 2023 and is currently projected to top 2.8% in the first quarter of 2024, according to the Atlanta Fed’s GDPNow tracker.
- Corporate earnings have also exceeded expectations, with fourth quarter S&P 500 Index earnings growing 4% quarter-over-quarter and 7% year-over-year. Earnings are currently expected to accelerate 6.5% for the first quarter and increase 12.5% for the full year 2024, according to S&P Global.
- U.S. productivity has also showed gains, increasing 3.2% in the fourth quarter, significantly higher than the 1.5% average productivity increase over the past decade.
- Overall, these factors point to an economy that is making the “soft landing” that the Fed was hoping for, but which many were skeptical could be achieved.
- Our outlook for the economy and markets in 2024 remains cautiously optimistic. We believe that if the economy continues to grow at a solid pace and corporate earnings continue to rise, then stocks should extend their gains this year.
- There are numerous risks to the “soft landing” outlook, including the risk that the ongoing wars in Ukraine and the Middle East will spread into broader conflicts, and that geopolitical tensions with China continue to worsen. Closer to home, the robust March jobs report heightened the risk that the Federal Reserve could further postpone interest rate cuts, which could dampen economic growth and derail the stock market. In addition, continuing partisan gridlock on Capitol Hill and the 2024 election cycle also have the potential to disrupt markets in the short term.
- As far as valuation, the broad S&P 500 index can be considered fully valued at 21.8 times forward 12-month earnings, above its 5-year average of 18.8 times. However, not all stocks or sectors are so fully valued, and we continue to look for and find pockets of opportunity, particularly in sectors which have lagged the overall market and are thus more attractively priced.
- We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities to benefit from a broadening market rally and potentially lower interest rates in the future. In the meantime, we still find short-term Treasury bills and money market funds attractive places to park cash at risk-free annualized yields above 5%.
- Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to active security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner
The Edgemoor Team
April 2024
