Market & Economic Commentary: Q1 2024
Quarter in Review
Investors entered 2024 with expectations for continued tailwinds, with a resilient economy strong enough to maintain employment but sufficiently moderate to allow the Federal Reserve to begin lowering rates. The enthusiasm for Artificial Intelligence that drove markets in 2023 carried over into the new year, fueling a market rally. By the end of the first quarter, U.S. markets reached new highs, and the gains initially concentrated in technology-centric companies had spread to other sectors and international markets like Europe and Japan. Major Indices in the United Kingdom, Germany, France, and Spain outperformed the S&P 500, signaling a broad-based market recovery beyond the technology sector.1
This strength persisted despite surprisingly resilient economic growth tempering declines in inflation and raising doubts about the timing of rate cuts. The Fed signaled potential cuts ahead, with the Fed’s latest projections, as shown in the “Dot Plot” below, indicating approximately 0.75% rate cuts in each of the next three years—2024, 2025, and 2026. However, Chairman Powell stated recently that the Fed remains “in no hurry.” This alignment of investor expectations with the Fed’s projections has led to an uptick in Treasury yields.2
Notably, commodities have also experienced a surge. Gold reached a new record high at $2,264 toward the end of the quarter, propelled by purchases from central banks diversifying their reserves and persistent retail demand from Chinese investors. The conflict in the Middle East has had a significant impact on oil markets, pushing the price of crude oil to over $85 after trading in the $70s in December and January. Cocoa has also risen, pushing up the price consumers pay for chocolate.
Interest Rates and the Election – What to Expect?
Fed officials have communicated plans for three-quarter percent rate cuts by the end of the year without commitment to a specific timeframe. Still, markets have recently begun to doubt this plan, given the persistence of inflation above the 2% target. It is notable that the current rate of around 3.8% is significantly below the rates of close to 9% in June 2022 and is considerably closer to the target. However, this last bit of inflation reduction is proving more challenging than expected. With oil prices accelerating and wage growth still strong, some investors have begun to believe that interest rates will have to remain at their current levels or perhaps even rise again.
Higher for Longer rates would disappoint equity investors and could lead to short-term market weakness. Nevertheless, the economy has proven capable of growth, even in the face of the rate increases of the past two years. One potential factor supporting economic expansion while restraining wage inflation – still largely absent from economic data – is how recent immigrants may be supporting job and spending growth while keeping a lid on wage pressures.3 Although an economic slowdown would be expected at some point, the Fed will continue to weigh that risk against persistent pricing pressures.
We note that investing in bonds of various maturities remains the optimal way to navigate a changing interest environment. Using what is called a Bond Ladder, we have been buying baskets of fixed-income securities with maturities across different time horizons. As a recent study published in the Wall Street Journal concludes, “The bond-laddering portfolio provides more-stable returns over various interest-rate environments,”4 as shown below.
Adding to potential near-term volatility is the upcoming election. The last two election periods have seen some market volatility, and with the contentious nature of the 2024 elections, investor anxiety is expected. Indeed, we may see further volatility before and after the election. Still, historically, irrespective of political outcomes, investors who maintain a long-term perspective and avoid reallocating based on fear are well-positioned for success. As the chart below demonstrates, staying invested, and not selling based on political concerns, has been the best course of action regardless of the political outcome. Conversely, those who chose to invest only during a Republican or a Democratic administration, and sold out during an opposing administration, would have seriously underperformed an investor who remained invested throughout, based on return data from 1896 through 2023.
Hypothetical Illustration
Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted.
Final Thoughts
This year has already proven to be uncommon for both the market and the election cycle. Traditionally, election years positively impact the stock markets, with most gains occurring in the latter half of the year. However, the S&P 500 is already up over 10% year-to-date, closely resembling the average for full-year returns. The tech sector, traditionally the poorest performer during elections, is leading in 2024.6 This has kept U.S. market valuations elevated relative to international markets, underscoring the importance of a globally well-diversified portfolio.
As we navigate the coming election and the ongoing geopolitical uncertainty, we will remain true to our long-term orientation of global and sector diversification and use what opportunities we can to find value for our clients.
Index Disclosure and Definitions
Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.
S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.
Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market and includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI). The index consists of the 25 emerging market country indexes. Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.
Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.
© Morningstar 2021. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
The Kaminsky-Silverman Group utilizes Symmetry Partners, LLC (SP), which is a third-party service provider that supplies market data and assists in creation and monitoring of factor-based investment models. SP is also an investment advisory firm registered with the Securities and Exchange Commission. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.
Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results.
This material is confidential and is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your investment. Any opinions, expectations and projections within this document are solely those of the Portfolio Manager(s) and/or Financial Advisor(s) identified, and do not necessarily represent the viewpoint of Shufro, Rose & Co., LLC or other Portfolio Managers at the firm. This report was prepared by Shufro, Rose & Co., LLC and is presumed to be correct. Shufro, Rose & Co., LLC is an investment adviser registered with the Securities and Exchange Commission. ADV Part 2A is available upon request or at https://adviserinfo.sec.gov/. Please contact Shufro, Rose & Co., LLC at (212) 754-5100 with any questions.
1 Clarfelt, H., Stacey, S., Steer, G., & Duguid, K., “AI Boom Drives Global Stock Markets to Best First Quarter in 5 Years,” Financial Times, March 28, 2024.
https://www.ft.com/content/1f471c88-d49f-4a52-8619-cc5c0c506008
2 Goldfarb, S., & Journal, F. S. F. W. S., “Why Treasury Yields Are Rising Despite Interest-Rate-Cut Expectations,” WSJ, March 26, 2024.
https://www.wsj.com/finance/investing/treasury-yields-rising-fed-interest-rate-expectations-4a157a85?mod=md_bond_news
5 Levit, B., “Could the 2024 Presidential Election Affect Market Performance?” Invesco, March 4, 2024. https://www.invesco.com/us/en/insights/market-performance-2024-presidential-election.html
6 https://www.barrons.com/articles/trump-biden-election-stock-sectors-c1e66112
