The US stock market continued its winning streak in the first quarter after finishing 2023 on a strong note. Large cap US stocks continue to outperform US small caps as well as International and Emerging Markets. However, most bond markets pulled back slightly in the first quarter after an extraordinarily strong finish in the final two months of year.
Markets are still grappling with inflation, which is proving to be stickier in certain areas than the Federal Reserve would like. Shelter costs, auto insurance, travel and leisure, and energy prices continue to be the more difficult areas of inflation to tame. Markets are pricing in the probability of the Federal Reserve cutting rates three times prior to year-end at a quarter percent each cut, however if the inflation reports come in stronger than expected, the market will need to adjust its expectations. This could lead to some consolidation in stock prices if the soft-landing scenario starts to look less likely.
The US economy is still on strong footing after GDP growth in 2023 was better than expected. GDP growth expectations have increased so far this year, driven primarily by a healthy US consumer, strong labor markets, and continued low unemployment. The increase in real wages for US consumers as inflation cooled, has helped US consumer spending remain more robust than anticipated over the last year. It will be important to monitor inflation’s progress for the remainder of the year to help determine how the Fed may proceed and when they may initiate the first rate cut.
Geopolitical issues continue to dominate headlines with Russia’s war against Ukraine dragging on with no end in sight. More recently, Iran’s attack on Israel has further increased tensions in the region as the market determines if this will lead to a larger conflict. Most geopolitical events have little effect on the market. Nonetheless, this situation bears watching for potential spillover effects on energy prices and global trade, which could add to an already uncertain inflationary environment. Markets have remained resilient when faced with a multitude of risks in the headlines. This means we may see some market consolidation as markets digest future geopolitical developments.
As we discussed in our last article, election years typically see increased volatility, at least in the first half of the year, and 2024 is unlikely to be an exception. Markets have risen during an election year 83% of the time, with positive returns in twenty out of the last twenty-four election years. During the four negative return years, economic growth and higher unemployment were the biggest culprits for negative market sentiment.
We continue to be mindful of all the risks the market faces in 2024, including a Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geopolitical risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond markets show positive returns at higher percentage rates the longer the time period measured. Please communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate markets in 2024.