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Q1 2024 Market Commentary

Fork in the Road for the Magnificent Seven

“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”


- Warren Buffett, February 2024 Letter to Berkshire Hathaway Shareholders

Global equity markets continued their impressive performance in the first quarter of 2024. A strong labor market and a pragmatic Federal Reserve have guided the U.S. economy through one of the fastest interest rate hiking cycles in history. In the first quarter of 2024, the Federal Reserve’s monetary policies balanced both a resilient labor market and stubborn but lower levels of inflation. In turn, encouraged by the improving probability of a soft landing, U.S. equity markets continued to rally, providing investors with reasons for both optimism and concern.


Coming into 2024 there were fears that a historic interest rate hiking cycle would cause a recession. However, the U.S. labor market added an average of 265,000 jobs per month from December 2023 through February 2024 (1), surprising economic forecasts, improving consumer confidence, and adding to above-average economic output. While hiring remained a bright spot, both the number of employees switching jobs and the number of job openings continued to decline, indicating a more normalized labor market. The number of employees who quit their jobs in January was 3.3 million, significantly down from a peak of 4.5 million quits near the end of 2021, and back to levels last seen before the pandemic (1). The number of job openings declined from 12.2 million in March of 2022 to 8.8 million in January of 2024 (1). All these numbers point to a labor market that is not falling off a cliff but instead might be settling into an environment with higher interest rates.


Inflation remained subdued but stubbornly above the Federal Reserve’s 2% target during the first quarter. However, the Federal Reserve now has more options to fight inflation versus when its back was against the wall in 2022 with a 9.1% inflation rate and ultra-low interest rates. The market's initial expectation of up to six rate cuts in 2024 has now dwindled to three due to both a series of strong economic data in the first quarter and sticky inflation. Fed Chairman Jerome Powell and the Federal Reserve Board acknowledge that they must tread with care to avoid a repeat of the 1980s when premature rate cuts reignited inflation. Alternatively, leaving interest rates too high for too long may drive the U.S. economy into recession. While Powell often cites this conundrum in his press conferences and alludes to the possibility of fewer-than-expected rate cuts in 2024, equity markets shrugged off these risks in Q1 and rallied higher.


While the valuations of the largest technology companies do not compare to the irrational levels of the dot com bubble of the early 2000s, they will make future returns harder to achieve for those stocks. The top 10 companies in the S&P 500 account for more than 33% of the index, well above the median of 22% since 1996 (1). Despite the stock market being up 10% in 2024, we saw top names like Apple, Tesla, and Google meaningfully trail the market to start the year. Meanwhile, once-forgotten sectors of the market continued to rally, with industrials, financials, and energy stocks all outperforming the market return so far in the first quarter. The broadening out of stock performance is positive for the health of the market, and a higher interest rate environment may result in a different set of winners for the next decade.


JFG Outlook


At the top of investors’ minds in 2024 is what to do with cash in money markets and certificates of deposit. On the one hand, cash investors receive a 5% yield, liquidity, and no stock market risk. On the other hand, those investors face reinvestment risk if rates fall and lower return prospects over time versus stocks. In our view, investors should strike a balance to hedge interest rate exposure. Utilizing this approach allows investors to benefit from both longer-term bond holdings should interest rates go down, and an allocation to shorter-term more liquid investments will protect cash needed for near-term expenses should rates go higher. In terms of credit quality, we continue to prefer higher-quality bonds over junk bonds because the prices of junk bonds are well above their long-term averages.


In his annual letter to shareholders, Warren Buffett emphasized how technology makes today’s investment environment more challenging. Individuals no longer need to call a broker or check the newspaper to manage their stocks. Investing has become more democratized, and individuals can watch the second-by-second change in stock prices and trade from their phones. This trend has significantly reduced the average holding period of stocks and feeds into Wall Street’s monetization of everyday investors. The fees associated with fear and excessive trading benefit Wall Street to the detriment of the individual investors who pay the trading costs and abandon well-thought-out investment strategies. The current fear is missing out (“FOMO”) on returns from hot tech stocks. Wall Street has taken that fear and pitched high-flying tech stocks and hedged equity strategies that may not always be in the best interest of investors. There will be new stock market winners as artificial intelligence and cloud computing technologies become widely available, but the valuation of these companies will still matter when recessions occur.


In environments such as today, where daily market moves seem separated from reality, it is helpful to stay grounded in one’s investment strategy. Focusing on what we can control — our mix of stocks and bonds, our investment costs, and the amount of trading in our portfolio — helps us limit mistakes and ultimately benefit from the long-term appreciation of markets. As investors, we cannot control geopolitics or predict the next pandemic, but building a portfolio that anticipates an eventual bump in the road helps investors achieve their goals and creates opportunities to capitalize when stock mis-pricings do occur. 

 

Thank you for your continued trust in Juno Financial Group.

 


 

Sources

  1. JP Morgan’s Guide to the Markets | U.S. Q12024