Q1 2024 Market Commentary

March ’24 Market Recap: The S&P 500 returned 10.6% in Q1, on a combination of two very powerful forces; dovish central banks and a continued broadening of the AI narrative. The S&P 500 rallied for the fifth straight month in March (a 99th percentile return, in fact since the lows of October). The recent market has witnessed a rally in everything except one asset class – bonds.

Moving Forward, It’s All About Growth: Inflation around 3% isn’t a threat to the market or economy by itself, but the Fed’s response to that sticky inflation could be to keep rates “higher for longer” and the impact of that will be increased chances for an economic slowdown—which remains a real risk to this rally. Bottom line, focus on growth. Growth is the rally killer.

The Market Loves Themes: The market really likes certain trends right now. This year has been great for “thematic investing,” where investors focus on specific themes rather than just overall market conditions. This is because the hope of interest rate cuts or no significant economic downturn has made investors optimistic about the stock market. Some popular themes this year include artificial intelligence, GLP-1 (a type of diabetes medication), energy and infrastructure projects, investing in Japan, bringing production back to home countries (onshoring), and others. While no reason to expect an immediate change here, worth noting that valuations are less favorable than they once were, and it is possible that this multi-theme market eventually gets replaced by a singularly themed market (the US Election) into the second half of the year.

History Suggests that it is Too Soon to Fade Equities: While in the near term it wouldn’t surprise us if equity markets pulled back, history would suggest that it’s too soon to fade equities. With the S&P up +27% in the five months off the October low, we looked back at the previous five-month periods where the S&P was up also +27%. Of the 130 observations, there was just one that resulted in a negative return 12 months later. Furthermore, the average 12-month return of all the observations was 15%.

Markets to begin 2024: A word of caution about the ’24 market rally (the S&P 500 is +10.6% YTD). The equity market seems as convinced about a soft landing today as it was convinced of a recession in 2022. In both cases, the short-term lesson is not to stand in the way of a market that wants to express an opinion, while the longer-term lesson is that the economy is a tortoise, and no matter the conviction level the equity market wants to have, the economy will take longer than most think to reveal its ultimate answer.

The Fed and What the Market is Saying: In sum, the Fed has no choice but to wait to see how the data come out. Economies do not slow with strong employment growth and new homes running closer to 700,000 than 600,000 – the long-term median. If there are no cuts, however, this is not necessarily bad news for the markets as it is a signal of sustained growth. The equity market is already relaying that signal.

Earnings Estimates Remain Steady, 2025 Growth Greater Than 2024 For Now: Earnings continue to muddle sideways as we sit between the end of one reporting season and wait for the next to begin. At $243.63 for 2024, the consensus is expecting earnings to grow 10.7%. What remains encouraging for equities is that 2025 growth is expected to be 13.3%. We are viewing the acceleration of growth expected next year as a positive for market fundamentals at the moment. Another positive for the fundamentals is that operating margins continue to expand, now sitting at 16.9%. This is the highest level going back to 2008 outside of the post-covid recovery. As long as margins are expanding the market doesn’t often get into too much trouble. It’s when they begin to roll over that more caution is warranted.

The Presidential Election Year: Since ‘52, the S&P 500 has not declined in a year in which an incumbent president was running for re-election (avg. return of 10%). Stocks have declined in presidential election years, but in each of those cases it was a year in which there was an open election with no incumbent running (‘60, ‘00, and ‘08). Presidents want to be re-elected and will use whatever policy levers are needed to boost the US economy. In fact, every president who avoided a recession two years before their re-election went on to win election. And every president who had a recession in the two years before their re-election went on to lose.