Quarterly Market Newsletter – Q1 2024
Key Points
- Strong economic performance and the anticipation of monetary easing pushed markets to record highs at the close of Q1
- The market started April on a weaker footing, primarily due to an unfavorable inflation report that came in hotter than expectations, prompting a reassessment by investors Federal Reserve policy. Interest rates rose across the maturity spectrum
- From a technical perspective, the market is mildly overextended after five months of continuous rally
- The recent sell-off, while unsettling, has remained largely orderly. The downturn was primarily driven by imbalances in the tech sector, while non-tech sectors have somewhat stabilized. A pullback could serve as a healthy reset for market sentiments
- Middle East hostilities are again in the news. However, recent military strikes between Israel and Iran appear to be carefully calibrated to de-escalate the situation
- We have been active with our strategies since the beginning of the year
2024’s Opening Act
In the first quarter of 2024, positive economic indicators and the anticipation of monetary easing boosted investor optimism, driving equity markets to record highs by the end of March. However, the onset of April brought challenges, including an unexpectedly high inflation report and increased geopolitical tensions, prompting a more hawkish shift in Federal Reserve monetary policy expectations. Interest rates moved higher as a result, and bond markets saw downward pressure on returns.
The recent market volatility is attributable to a mix of fundamental and technical factors. While the Fed has been successful in slowing inflation over the past year, bringing it down fully to the target range of 2% remains a challenge. The latest Consumer Price Index (CPI) report showed a year-over-year increase of 3.5% in March, accelerating from 3.2% in February. This marks the third consecutive month of strong inflation data, suggesting that the disinflation process may have stalled. Additionally, escalating geopolitical tensions in the Middle East have pushed up oil prices, further exacerbating inflation concerns.
Despite these headwinds, the US economy has shown remarkable resilience, supported by strong job growth that continues to support retail sales and consumer spending. This economic strength provides the Federal Reserve with more flexibility in timing interest rate adjustments. Initially, Fed officials predicted three rate cuts in 2024, but their tone has shifted to a more cautious stance regarding the timing and scale of potential rate reductions. Federal Reserve chair Jerome Powell emphasized that solid economic growth allows for a delay in rate cuts as they continue to wrestle with the stubborn inflation.
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management
Market expectations have since adjusted, with traders now anticipating fewer rate cuts this year, and possibly even fewer in 2025. Federal Reserve officials are likely waiting for definitive signs that inflation is cooling before reducing borrowing costs. Current economic conditions have led some economists to speculate that the next Federal Reserve action might be a rate hike rather than a cut. While further increases seem improbable at this stage, it is more likely that rates could remain unchanged for an extended period to allow the economy to stabilize and inflation to continue its downward trajectory.
From a technical perspective, the market may be over-extended after five months of continuous gains. This is the first significant pause in the current bull market rally since October 2023. The recent sell-off, while unsettling to some investors, has largely been orderly, and could represent a necessary and healthy correction to address technical imbalances such as overcrowded positions, complacency, and inflated valuations accumulated during the prolonged rally. Notably, the recent weakness is largely driven by excesses in the tech sector, which has experienced a significant rally over the past few months. Meanwhile, non-tech sectors are beginning to stabilize, providing us with some confidence that the market may be simply recalibrating rather than facing a more prolonged downturn.
State of Economic Health
The US economy is still flexing its muscles, powered by strong continued activity by the consumer and large-scale government spending. GDP growth in the fourth quarter of 2023 was 3.4%, down from a torrid 4.9% growth rate in the third quarter. One of the hallmarks of the current trend of economic resiliency is the continued strength in the labor market. Despite a decrease from its post-pandemic peak, the employment sector remains healthy and vibrant. In March, the economy created an impressive 303,000 new jobs, handily topping consensus expectations for 200,000 jobs growth and marking the strongest monthly gain in nearly a year.
Source: FactSet
2023 was a rough ride for the housing market, with home sales hitting their lowest point in nearly three decades. High borrowing rates, low inventories, and high selling prices were continuing impediments in the existing home market. Ironically, home builders have stepped into the breech, as they are one of key sources of new home supply in a historically tight market. In the old days, a Fed rate hike cycle such as we have seen would have crushed the home builder stocks and cratered their earnings. In 2023, and now 2024, market dynamics are helping to support the builders. All real estate is local, of course, but on a national basis we continue to experience a housing shortage. The few exceptions are in markets that overbuilt rental and/or new homes in the last few years of cheap borrowing.
Closing Remarks
The equity markets have started the year strong. Across the board, US equity benchmarks posted gains, signaling a broadening rally that extends beyond the once dominant tech sector. This diversification of market leadership is an encouraging development, indicating a healthier, more inclusive investment landscape.
However, as April began, signs of weakness emerged in the financial markets. Market performance is significantly influenced by expectations around the Federal Reserve’s interest rate decisions. Expectations of fewer rate cuts have increased after a series of reports showed inflation higher than anticipated, which have weighed on the market. Additionally, after five months of continuous gains, technical imbalances have appeared. Some pullback is to be expected, and can be considered healthy and necessary for the market. We suspect the disinflationary process has stalled, but is not completely dead. For the market to overcome its recent instability, we need clear signs that inflation is beginning to decrease again.
Market valuations, while not the most reliable indicators for timing, hint at reduced capacity for the market to absorb shocks. The more compelling valuations of recent years are now behind us, and although this doesn’t necessarily foretell immediate market corrections, it does point to a potential scenario where equities might struggle to absorb any unwelcome developments.
We have been active with our strategies since the beginning of the year. In our flagship Ascent Dividend Focus strategy, we parted ways with several laggards, and took the opportunity to initiate positions in companies that we believe are poised for a turnaround, such as RTX (previously known as Raytheon Technologies), Disney, and Starbucks. Additionally, we enhanced our technology sector exposure by incorporating new positions in Oracle and Meta Platforms (formerly Facebook). For our Global Growth strategy, we reduced investments in high-valuation tech stocks like Nvidia and CrowdStrike, shifting towards a slightly more defensive stance by bolstering our investments in the healthcare sector, including a new position in Eli Lilly. In the Income Portfolio strategy, we divested from a few additional laggards, and introduced investments in companies like Cummins International, which benefit from overall economic vitality.
In acknowledging these dynamics, we remain vigilant and respectful of the market’s current strengths and potential vulnerabilities. The investment landscape is as unpredictable as it is humbling, and as always, we are here to navigate these opportunities and challenges alongside you. Our dedicated investment team prioritizes our clients’ interests above all, ensuring they remain at the forefront of our strategies. We are grateful for your ongoing trust and confidence.