Happy Spring to All

The opening quarter of 2024 has brought with it some unexpected results for investors, and we wanted to share our thoughts on what has recently transpired and what lies ahead.

Including the final three months of 2023 up until this point in the year, the SP500 Index has grown by over 15%, including approximately 6% year to date in 2024. You will often hear the Index, which is widely regarded as the barometer for large-cap US equities, broken down into various segments from market capitalization to style and sector.

When we look at those segments, we see a familiar refrain from recent market commentaries: Companies with larger capitalization have performed better than the small caps, growth strategies have edged out value plays though not by a ton, and the Information Technology and Communication Services sectors remains hot. 

Conversely, Real Estate is struggling, and the Utilities sector is also lagging the overall market. From a geographic standpoint, while overseas indices have varied in their performance, they have been overwhelmingly outperformed by the US equity markets in terms of dollar growth recently.

Style Box Performance Q124 via via FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management, Cumulative Total Return including dividends reinvested
FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management

With all that said, much of the growth in the US markets can be attributed to the now famous “Fabulous Four” – Nvidia (+84%), Amazon (+24%), Meta (+48%), and Microsoft (+14%) – notably not the “Magnificent Seven” of prior years with Tesla having a tough year & Apple dealing with antitrust pressures. (Alphabet is flirting with a 52-week high so something to keep an eye on there.) The point here is the very narrow concentration in high-performing US Large Cap companies.

By some measures, the concentration within US equity markets is at historic levels, with the 10 largest companies now accounting for 33% of the S&P market cap. However, the fears of a bubble are a bit premature, in our opinion. According to a recent Reuters article “…over seven periods of extreme concentration in the past century, including 1932, 1939, 1964, 2009 and 2020, average returns were 23% higher in the 12 months after.” Furthermore, the breadth of SP500 sector performance has expanded a bit, as 5 of 11 sectors are outperforming the SP500 as of the end of March.

We believe the early 2024 pop in the market has mostly been driven by the expectation of multiple interest rate cuts from the Federal Reserve by year’s end. Not too long ago, there was an expectation of somewhere between 3 to 6 rate cuts in 2024, with some expecting cuts to begin in March.

At USAG, we have not been trying to forecast the timing of rate cuts, other than to say that we do expect some rate-cutting in 2024 – that remains our position. However, given the number of pieces of economic data that we have seen year-to-date, most recently March’s economic activity figures, we are anticipating 1-3 rate cuts this year, with the potential for a July cut being the most likely, but hardly a foregone conclusion.

The selloff last week in equities was driven largely by a resetting of expectations for investors that the sugar rush of the first Quarter may have been a little much, a little strong, and that we should likely temper our expectations for the remainder of 2024. Remember, volatility is just a part of investing and small corrections to the market are perfectly healthy. Based on the strong jobs numbers, positive GDP (probably around 2% for the year vs 3% for 2023), lower inflation and high corporate earnings, the S&P could see more growth in the second quarter.

What are the headwinds we’re tracking? Unfortunately, there are several! An election year may bring more irrationality to markets, but we stress – do NOT let your political opinions interfere with sound investment decision making, and we have charts aplenty to support our thesis that investment markets are largely (and broadly) apolitical. Geopolitical challenges in Ukraine, China/Taiwan, and the Middle East could cause global disruption, particularly in energy markets. A hard-charging US consumer could keep inflation rates higher than expected and continue to delay interest rate cuts.

But we really do think that investors are set to be well compensated for allocations to fixed income, as the result of 1% moves in interest rates greatly favors investors if rates are cut while current high yields act as a solid buffer should interest rates remain the same (or even if they are increased).

We need to resist the urge to chase big gains with the risky stock of the day and remember that our goals are to be investors, not gamblers.  We must be content to let the gains and income derived from the portfolios “come to us” rather than chase past returns. As economic news comes out, we can always adjust our allocations and reposition our investments, but we strive to preserve your investment goals and objectives from rash decision making.

If your goals or objectives for your portfolios ever do change, and certainly there are plenty of curveballs life can throw at us that may trigger a change in plans, then please talk to us and we’ll tailor your investment allocations to manage those goals. As always, we thank you for the support you have given us and we hope you have a healthy, happy spring!

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Advisory Group, a registered investment advisor and separate entity from LPL Financial.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Bonds 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.

Past performance does not guarantee future results.

Asset allocation does not ensure a profit or protect against a loss.

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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Advisory Group, a registered investment advisor and separate entity from LPL Financial. The LPL Financial registered representative(s) associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.

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