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by Wealthstone Group on Apr 16, 2024
Germans Bombing Pearl Harbor
What? Over? Did you say 'over'? Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Heck no!...It ain't over now, 'cause when the goin' gets tough, the tough get goin'. Who's with me? Let's go! Come on!...
-Animal House (1978)
Executive Summary
- We saw positive overall returns throughout much of the domestic equity markets in the first quarter.
- The expectation for the Fed cutting interest rates was greatly reduced through the quarter as the US economy has exhibited above expectation strength coupled with continued stickiness in inflation. We are of the opinion that eventual easing by the Fed will be a result of continued inflation easing rather than from economic weakness.
- Diversification, disciplined risk management, and a focus on long-term investment objectives are key pillars for portfolio construction for the remainder of 2024 in our opinion.
We started 2024 with broad belief among investors that we would see up to six cuts by the Fed,
fueling further growth in the equity market. Instead we saw stronger economic data in the US and signs of green shoots in many areas of the global economy that have seen greater weakness relative to the US. The focus on forward interest rates reductions by many investors was resulting in a single focus. Interest rates are an important metric and play a pivotal role in the overall economic framework but do not solely drive the equity markets. Many market participants were able to look past this focus and were able to maintain resilience in spite of perceived adversity such as the Germans bombing campaign in the Pacific.
Market Performance Barometer Through 3/31/2024
The changing opinions on forward rates is clearly reflected in the yield curve with higher rates later in the curve. We like lower interest rates as much as the next person but the reason for this is important. The US economy has exhibited continued strength. Jobs numbers have surprised to the upside and inflation has had greater persistence than we were expecting. The Fed made the mistake in the 1980s of lowering interest rates too quickly which resulted in the resurgence of inflation that resulted in the need for rates to be increased dramatically to stamp out the inflation. We view eventual easing by the Fed as being more from an easing of inflation as opposed to slowing growth, as is often seen in easing cycles, which should be a net positive for the US economy as well as the equity markets with higher potential earnings growth.
Equity markets experienced a rollercoaster ride in the first quarter of 2024, characterized by moments of exuberance followed by bouts of caution. Major indices such as the S&P 500 and the NASDAQ reached new highs, propelled by robust corporate earnings and continued fiscal stimulus measures. However, concerns over inflationary pressures, supply chain disruptions, and geopolitical flashpoints injected periodic volatility into the markets. Domestic small-cap look increasingly attractive relative to large-cap in our opinion with historically wide valuation differentials.
The fixed income landscape witnessed a tug-of-war between expectations of tightening monetary policies and lingering concerns over economic growth. Bond yields gyrated in response to shifting market dynamics, with investors closely monitoring central bank communications and economic indicators for clues on the future trajectory of interest rates. Safe-haven assets remained in demand amid geopolitical uncertainties, contributing to the resilience of government bonds. Muni yields have not moved higher in lockstep with Treasury yields but remain attractive in our opinion.
Commodity markets experienced turbulence during the first quarter of 2024, driven by a confluence of factors including supply chain disruptions, geopolitical tensions, and shifting demand dynamics. Oil prices soared to multi-year highs amidst fears of supply disruptions, while agricultural commodities faced volatility due to weather-related disruptions and supply chain constraints. Precious metals attracted investor interest as a hedge against inflation and geopolitical risks, adding to the complexity of commodity market dynamics.
We remain of the opinion that diversification, disciplined risk management, and a focus on long-term investment objectives will be key pillars of success in the dynamic environment expected to be experienced in the remainder of 2024. As investors, it is imperative to remain vigilant, agile, and mindful of both risks and opportunities that lie ahead.
Louis Tucci; Partner | Senior Investment Advisor
Paulo Aguilar, CAIA; Partner | Senior Investment Advisor
Mark H. Tucker, CFA; Portfolio Manager
David Crook; Macro Economist
Securities offered through Arkadios Capital. Member FINRA/SIPC. Advisory services through Arkadios Wealth.
Past performance does not guarantee or is indicative of future results. This summary of statistics, price, and quotes has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed. All securities may lose value, may not be insured by any federal agency and are subject to availability and price changes. Market risk is a consideration if sold prior to maturity. Information and opinions herein are for general informational use only and subject to change without notice.
This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy, or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such. This information should not be construed as legal, regulatory, tax, personalized investment, or accounting advice.
The information is current only as of the date of this communication and we do not undertake to update or revise such information following such date. To the extent that any securities or their issuers are included in this communication, we do not undertake to provide any information about such securities or their issuers in the future. The views expressed reflect the author(s) personal view and not the view of Arkadios Capital or Arkadios Wealth. This report is provided on a “where is, as is” basis, and we expressly disclaim any liability for any losses or other consequences of any person’s use of or reliance on the information contained in this communication.