DWM's 1Q24 Market Commentary: Solid Start to 2024!

April 04, 2024

The US economy continues to be resilient and stock markets rejoice to start off 2024. Bonds experienced a small pullback as markets ratcheted back rate cut expectations following strong economic data. Many alternative assets have had solid performances to start the year as well. No signs of recession are in near sight and inflation has moderated but still a concern. Most investor eyeballs are focused on data prints and speculating what the Fed will do next. But before we discuss what’s ahead, let’s see how the major asset classes fared in 1Q24.

Equities: US large caps dominated once again as evidenced by the SP500 soaring 10.6%! The “Magnificent 7” started the year like how they ended the last one, however March saw the group coming back down to Earth as the rest of the SP500 outperformed the tech-heavy megacaps at the top. Definitely healthy to see that positive market breadth. What may be becoming unhealthy are the valuations where some stock market areas are now trading – per below, we can see that we are reaching a rather “lofty” level when comparing current valuations to historical averages.

Fixed Income: As rates go and expectations for rates go, bonds follow accordingly. So when the market went into 2024 thinking that the Fed was going to cut six times and then they ratcheted it back to just three (and maybe we actually get less than that), yields rose and thus bond prices fell. The Barclays Aggregate Bond Index (“AGG”) backed off a little, -0.8% whereas its international counterpart, the Barclays Global Aggregate Bond Index, fell 2.1%. There’s almost an unprecedented amount of volatility in this space given all the hyperfocus on the Fed and rates. Given Fed Head Jerome Powell just recently signaled that cuts are still coming this year, we think bonds remain an attractive area for the diversified, long-term investor.

Alternatives: Great start to 2024 for most alternatives as witnessed by the Wilshire Liquid Alternative Index up 4.9%. Big winners in this category included gold* +7.6% and managed futures**, +8.0%. However, not all alts were up, e.g. real estate*** which is rate sensitive struggled, off 2.7%.

Cash: With a 1.3% 1Q24 return, cash lagged many asset classes while still carrying a reinvestment risk amid potential rate cuts. We like to remind people that cash/cash equivalents like CDs and Money Market Funds are not good long-term investment solutions. The graph below shows how it generally underperforms after rates have peaked.

In summary, for the diversified investor, 1Q24 was a very good time period. But what is on many investors’ minds now is can the stock rally continue and will bonds find their way???

Like we have said before, its all about inflation and the Fed these days. Take a look at the graph below showing how inflation has bounced around over the last few decades. Of course, the Fed and its tools exist to help our US economy achieve price stability and sustainable economic growth, thus controlling inflation is a major goal along with low unemployment. The good news is that after hitting a 40 year high due to the pandemic fallout, inflation has indeed moderated. But inflation can be sticky. There are several components going into the calculation of inflation – and there are several different measures of inflation (CPI, Core CPI, PCE, etc). In any calculation measure, inflation is down from 2022 highs which is great! But prices are not. Lower inflation means the level of prices is still rising, just more slowly than before. People sometimes confuse inflation with the level of prices and believe inflation is getting worse because the price level keeps going up. Thus, many people don’t realize how good the US economy is right now or are just negative because they are still shellshocked by how much they’re paying at the local grocery store versus what they did just a few years ago. (WSJ had a great article on that showing a basket of food is up 37% since 2019!) In any event, the economy is doing very well right now with no hint of recession coming this year. Unemployment remains below 4%, consumer spending remains strong, and wealth expansion is a real thing given the last half-year’s stock market run. It doesn’t hurt to smile when your portfolio has never been higher! 😊

In conclusion, there are a lot of things to be positive about going into 2Q24. That said, as mentioned above, reemergence of inflation, lofty valuations within some areas of the stock market, and political instability – we are just upon what will surely by a volatile Presidential Election – are ongoing concerns. Stock market pullbacks of 5% or more are common, occurring roughly three times per year. We have yet to have our first one in 2024, so don’t be alarmed when it happens. That doesn’t mean you should run for the hills – never let your emotions alter your investment doctrine. For the long-term investor, the correct means of action is generally to stay the course using a diversified portfolio overseen by your wealth management expert. If you need assistance or a second opinion, give us at DWM a call.

* represented by iShares Gold Trust

** represented by American Beacon AHL Managed Futures Fund

***represented by the iShares US Real Estate ETF

Detterbeck Wealth Management is a fee-only financial planning / wealth management company with offices located in Palatine, IL (Chicago area) and Charleston, SC areas serving clients locally and across the country. To contact us about setting up an appointment, please see our contact us page