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Dear Friends,
As we wrap up the first quarter of 2024, the United States economy and major stock indices continue to show strength and resiliency despite many risks and headwinds both domestically and abroad.
At the time of this writing, the S&P500 index is up 8.78% since the start of the year – and although economists have been forecasting a shallow to moderate recession since at least 2022 – it still has yet to materialize. Over the past few years, much of the stock market growth can be attributed to the “Magnificent Seven” large technology stocks. However, at the end of 2023 we saw a broadening of this rally as many other areas of the market began to catch up as the effects of the pandemic subsided.
Despite its challenges, the US economy continues to deliver positive GDP and jobs growth, indicating we may still achieve the “soft landing” the Federal Reserve has been aiming for and avoid a major recession. It’s worth noting that recession is part of the normal economic cycle, and, if we are going by the book definition of what a recession is - two consecutive quarters of negative GDP growth - then we already weathered two shallow recessions in 2020 and 2022.
The Bureau of Labor Statistics reported a strong 303,000 jobs were added in March with an unemployment rate of 3.8 percent – well below the historical average unemployment rate of 5.7%. At the beginning of the year, many experts were predicting a more “normal” 8-12% annual return for the S&P500 – as well as a likely recession. Based on the data we have seen so far to start the year, it appears we’re on track to meet and possibly exceed many expert predictions for 2024 as far as market returns and avoiding an economic recession.
The fight against inflation and what the Federal Reserve Board - led by Chairman Jerome Powell - does to counter it, continues to be one of the main drivers of the US economy today. In March, the 12-month trailing core inflation ticked up to 3.5%, up from 3.2% the month before, signaling that the Federal Reserve is not quite out of the woods yet in its mission to reduce inflation back to “normal” levels.
While Chairman Powell did not indicate further interest rate increases were on the table for 2024, he did say in a recent press release that interest rate cuts may be further out than previously thought. The Fed has remained consistent in its commitment to reach its long-term 2% target inflation rate. Powell’s announcement resulted in little reaction from stock markets. However, bond markets were negatively affected, and continue to struggle in this higher interest rate environment.
Despite the struggles in bonds this year, we’re cautiously optimistic that when interest rates begin to tick down, we should begin to see price appreciation in fixed-income investments. In the meantime, higher yields provided by bonds are generating increased investment income for some clients. It’s notable that for the first time in over ten years, traditional bonds are now providing yields that exceed inflation. Our portfolio management team anticipated this may occur once interest rates peaked, and we made strategic moves to exit inflation-protected bonds as a standalone position throughout our managed portfolios in early 2023.
Although we’ve seen a strong performance of stocks to start the year, many are focused on the upcoming election and what it may mean for their investments and the economy in 2024. While election years have historically come with higher volatility – at least until primary season is over - the good news is that when looking at investment returns in the 12 months after a primary election, stocks return on average +11.3%, versus +5.8% in similar periods during non-election years, and there has never been a recession during an election year.
We are expecting continued volatility in the markets and the economy over the next few months as the election approaches. However, if history is any indicator, we will likely come out on the other side better than before regardless of the outcome, as long as we stay the course. By focusing on diversification across all asset classes and market caps, and rebalancing portfolios when the opportunity presents itself, we believe our clients are well positioned to take advantage of growth opportunities while also protecting them from the increased volatility that is typically seen during an election year.
We hope that by focusing on our client’s needs and staying true to our investment philosophy of low cost, thoughtful investment management with a focus on diversification, we can do our best work and help our clients feel confident about their futures. If you have any questions about our latest market commentary or your financial situation, please contact us – we’re here to serve you.
Sincerely,
Ted Smith, Founder & Chairman, RHU, CLU®, ChFC®
Danica Goshert, Senior Vice President, CFP®, CDFA®, AIF®, MBA
Dan LaNasa, Associate Vice President, CFP®
Charles Stewart, Associate Vice President, CFP®
Marcus Schaller, Manager of Financial Planning Services, CFP®, APMA™
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
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