2024 Q1

1st Quarter Market Review & Outlook 

There’s a lot of debate over when the Federal Reserve will cut interest rates and if we will have a recession at all.  Analysts, who had expected up to six interest rate cuts this year, are finding that the economy has been more resilient than expected in the face of higher inflation and higher interest rates. And despite wage pressure and a tight labor market, the service side of the economy appears to be doing better than the manufacturing side as we are observing industrial production decline. So far this year, the stock market has moved higher as many companies continue to find ways to grow earnings through cost-cutting measures, such as reducing headcount, or selectively raising prices.  

The continued rise in personal income, largely due to wage growth, has supported consumer spending which in turn has aided the economy. However, the economy is in a tenuous situation as inflation remains higher than desired,  especially in the everyday items we all consume, e.g. food,  gas, and shelter. While retail sales haven’t shown a significant dip yet, it is something that could happen at any  time this year. We will be looking closely at the data in the months to come.  

As the markets have moved higher this year, the  concentration of the largest 10 stocks continues to increase.  According to Michael Cembalest at J.P. Morgan, this is the highest market concentration of the top 10 stocks,  compared to the largest 50 stocks by market cap, since  1972. In and of itself no analyst would use this statistic to dictate investment direction, however, it does make me  think of a few things.  

First, increasing concentration makes market capitalized indices, like the Standard and Poor’s 500 index, less reflective of the overall state of the economy, as the indices  give higher weightings to the largest companies. Second,  earnings have increased to help support the rising prices of these largest companies. Cembalest adds that the returns  

of the Magnificent 7 stocks have had since 2019 can be attributed to sales growth with only a very small amount coming from multiple expansions. This is very different than  the tech bubble of 2000 – 2002 where most of the increase during that time came from multiple expansions (stocks getting more expensive when compared to their earnings).  

When you combine all of the components of the economy,  the jury is still out on whether we have a recession. I could see having one quarter of negative GDP, but I’m not sure we will get two consecutive quarters which would meet the general definition of a recession. With the leading indicators that we are watching, we still expect the  economy to reaccelerate in 2025, with the possibility that inflation returns as well.  

We anticipate the Fed to begin cutting short-term interest  rates this year, but it may not happen until the end of the second quarter or even the third quarter. In the face of our resilient economy, the number of interest rate cuts analysts are predicting has declined. Now, despite the slowdown in the economy that we expect, we anticipate the stock market will still have a positive year, albeit not as strong as  last year.  

We continue to like our fixed income and equity allocations and will be looking to make some adjustments this coming quarter to our equity exposure.  

If you have any questions, please do not hesitate to contact  our office, and as always, we thank you for your trust.