The first quarter of 2024 ended March 31st was by all accounts an exceptional quarter for stocks. The S&P 500 returned 10.55% during this period. The advance was more broadly based than in 2023, though large growth stocks still led the overall performance of the S&P.
The prevailing wisdom at the beginning of 2024 was that the Fed would lower interest rates multiple times, and that 2024 would be a banner year for bonds. So far, that has not proven to be the case, as bond yields have risen. As a result, bond prices have generally fallen. The Bloomberg Aggregate Bond Index, which considers both interest and price movements of bonds, fell bringing its return to -̶0.78% for the quarter.
The culprit in the bond markets? The economy and inflation have remained stubbornly resistant to the Fed’s efforts to rein them both in. The level of the Fed’s leverage to control the economy was suspect, in our opinion, and the strength of the job market has surprised many. As a result of the employment environment, and perhaps also due to advances in both housing and stock prices, U.S. consumers have remained resilient. Government spending has not slowed, though regulatory issues have added uncertainty and created difficulties for businesses attempting to invest and expand.
Despite the resilience of the economy, we are seeing some potential weaknesses. Delinquencies in the mortgage and auto loan markets are creeping up, a signal that consumers may be financially stressed. The job market, though still healthy, is not as strong as it had been in 2023. Credit card balances have risen, and consumers may be close to being tapped out.
Other risks for the economy and markets exist. Internationally, we’re facing increased trade tensions, wars on multiple fronts, and choke points and capacity constraints such as those on the Suez and Panama canals. The closing of the Port of Baltimore and potential electrical grid transmission constraints are not helping either. There is an increasing possibility of chaos in the commercial mortgage market. Though this should be theoretically limited, with regional banks most directly impacted, there is always the risk of a problem spreading. The government is facing a growing debt problem and an increased interest burden. Irrespective of who wins in September, the government’s ability to spend will become more limited.
On the other hand, the economy has grown despite the housing market seizing up. If interest rates fall or the housing market otherwise unlocks, the economy could experience a reacceleration. Notwithstanding a slowing of job growth, the fact is jobs are still being created. Given the current situation, risks, and potential upsides, our best assessment is that the economy will muddle forward with low, single digit growth.
Returning to the markets, falling interest rates are usually more favorable to growth stocks. Year-to-date, that hasn’t been the case. We believe this is due to the latest theme – artificial intelligence (AI). Going forward, while there still may be some opportunities, many stocks with an AI theme may have gotten ahead of themselves. This doesn’t mean they will stop going up. It’s just that there is increasing risk. Other sectors of the markets offer improved value, though clearly not all stocks are cheap. There is still upside, in our opinion. We think greater diversification is the best strategy.
With respect to the fixed income markets, we do believe it’s most likely that the Fed will begin to lower rates this year. But the Fed only has direct control over short-term rates. The federal government’s immense need to borrow may make it difficult for longer-term rates to fall. Additionally, if the economy stays strong, inflation may persist, and long rates may not fall. The flip side to that is that if we see economic weakness, interest rates are likely to fall. So, what’s an investor to do? We recommend spreading fixed income investments over a range of maturities. Longer duration (a proxy for maturity that also considers the timing of interest payments) bonds tend to perform better when interest rates fall. So yes, do invest in longer duration bonds and lock in some of those higher rates if you are a fixed income investor. But we also recommend holding either cash or shorter duration bonds so that one can take advantage of higher rates should they present themselves.
April 2024 First Quarter Update 5845 Widewaters Parkway East Syracuse, NY 13057 (315) 234-9716 www.pcm-advisors.com Past performance does not guarantee future results. Pinnacle Capital Management is an SEC Registered Investment Advisor and proud member of the Pinnacle Family of Companies, an organization designed to provide a full range of financial solutions to individuals, businesses, and institutions. For more information on our member companies, visit Pinnacle-LLC.com. Opinions are our own and do not constitute financial advice. Talk to your financial professional for any advice specific to your situation.