Q1 2024 Investment Update

 

This update is for discretionary accounts.

 

 

Summary:

• The combination of fiscal stimulus and strong spending from cash rich consumers has kept the economy strong. Making it one of the few times that the federal reserve has raised interest rates sharply without causing a recession.

• With inflation dropping sharply over the last few months, the federal reserve has signaled that it may begin lowering interest rates by the middle of 2024,

• Lower interest rates should benefit both stocks and bonds in 2024.

• Interest rates on Government bonds finally moved above the year over year inflation rate in the middle of 2023.

• Historically, 10-year U.S. government bond yields are usually higher than the year over year inflation rate as measured by the Consumer Price Index. The year-over-year change in the Consumer Price Index dropped to nearly 3%. This would imply that longer-term government bond yields have reached fairly valued after many years of being overvalued.

• Because of the large weighting of a few stocks in the S&P 500 and NASD 100, the stock market appears to have had a strong rally in 2023. The reality is actually very different.  The equally weighted version of the S&P 500 and the Value line index of 1675 stocks are only up about 10% for 2023.

• Although we believe stock prices should move higher in 2024, the end of the year rally has pushed stock valuations back towards the high end of historic levels. This suggests that the upside for the stock market could be limited early in the year. Earnings forecasts would need to move up to generate a strong rally in 2024.

Economic and Monetary Outlook:   

• Prior to 2023, thirteen of the last sixteen times the Federal Reserve has raised interest rates sharply, recession has followed.

• The current economic environment appears to be only the fourth time over the last seventeen times that a significant rate increase did not cause a recession.

• A combination of fiscal stimulus and strong spending from cash rich consumers has kept the economy strong. Making it hard to forecast a recession in the near-term.

• The federal reserve appears to have stopped raising interest rates for this cycle. Several Federal reserve governors have hinted that the fed funds rate could be lowered in 2024.

 

 

 

Equity Market Outlook:

• For most of 2023, the recovery in equity prices has been lead by a small number of stocks that have large weightings in the averages, with the majority of other stocks lagging.

• However, over the last two months helped by the expectations that interest rates could decline and that a recession could be avoided the rally has broadened out.

• The equally weighted S&P 500 index went from flat to up about 10% for the years in a few weeks. Smaller and mid-cap stocks averages, which had been flat most of the year also began to rally on the expectations of lower interest rates and no recession.

• Consensus 2024 S&P 500 earnings estimates are currently $246 a share. This put the S&P 500 at about 19.5 times 2024 estimates at the current price level. This puts valuation back into the upper end of its historical range.

 

Fixed Income:

• Interest rates moved sharply higher in the first half of 2023 and have now begun to drop.

• Interest rates on government bonds moved above the year over year inflation rate in the second half of 2023.

• This would imply that longer-term government bond yields have reached fairly valued after many years of being overvalued.

• For the first time in a number of years shorter duration bonds of 2 to 5 years yields jump. This gave us an opportunity to move from short duration bonds of 1 year or less to slightly longer duration bonds in the two-to-three-year range, to pick up some additional returns.

Investment Strategy:

• We remain over weighted in terms of U.S. stocks and under weighted fixed income. However, we have begun to increase allocations to bonds as interest rates went up.

• Our main areas of focus have been large-cap domestic equities and mid-cap growth oriented domestic equities.

• Valuations appear to be better in small and mid-cap equities, which is where we would like to increase our exposure first.

• We used the recent increase in interest rates to add to our fixed income holding and lengthen maturities.

Roy Blumberg,

Partner

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The economic forecasts set forth in the presentation may not develop as predicted

Stock investing involves risk including loss of principal.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets

 

Bonds (fixed income) are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

No strategy assures success or guarantees against loss.

                Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of         principal and potential illiquidity of the investment in a falling market. The economic forecasts set forth in this    material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.