DSWM Quarterly: Q1 2024
Investing Insights
The market run continued its pace right into 2024, with the starting line of this rally going back to the beginning of 2023 (with a few stumbles along the way), it is beginning to look more like a marathon than your everyday run. Investors had plenty of reasons for optimism entering this year, consensus was for a soft landing, whereby a recession would be avoided, inflation would continue its trend down, and the Fed would start cutting interest rates as soon as March.
The U.S. equity market delivered a 10.60% return for the quarter, notching it’s best first quarter since 2019. The nature of the rally during the first quarter of this year was far more balanced between growth and value stocks, with value stocks narrowly beating growth stocks. This is a stark difference from 2023 where growth stocks, fueled by the big tech names of the “Magnificent 7”, dominated U.S. equity returns. Looking outside of the U.S., international equities were up 4.30% for the quarter, as indicated by the MSCI ACWI ex-U.S. index. This is despite weakness exhibited across many developed market economies, with some even already experiencing recessions. The Japanese equity market stood out amongst all developed economies, the Nikkei 225 broke a record that stood for 35 years, and the Bank of Japan hiked its short-term borrowing rate back to zero (ending the BOJ’s negative interest policy after 17 years). For emerging market equities, the MSCI Emerging Markets index gained 2.20% for the quarter. One market to highlight amongst emerging economies is the equity market of India, as that market has outperformed even the S&P 500® over the past year. The economy of India has been the main beneficiary from rising negative global sentiment towards Chinese exports.
The fourth quarter of 2023 marked one of the strongest quarters on record for U.S. bonds, the Bloomberg U.S. Aggregate was up nearly 7%, all driven by bond investors’ relief to hear the Fed signal the end of the rate hiking cycle. Unfortunately, those expectations shifted in the first quarter as Fed officials began to change their tone towards the timing and number of rate cuts in 2024. By the end of the first quarter, the expected timing for the first rate cut had been pushed out to June and the number of cuts expected for 2024 dropped from five to three. The change in “Fed speak” pushed yields higher (prices lower) and pulled the Bloomberg U.S. Aggregate Bond index down 0.80% for the quarter. Digging deeper into the bond market over the quarter, long term bonds were most affected by the change in expectations and high yield bonds were a lone bright spot by delivering a positive return. The move that we made to a combination of iBond term specific exchange traded funds and laddered individual bonds, that we hold to maturity, will help us avoid the impact of the negative returns on client accounts.
If we look forward to the next three quarters of 2024, you must wonder how much energy does this market rally have to keep running the marathon? The reasons for optimism entering 2024 have not completely delivered, inflation has plateaued above the Fed’s target level and the Fed’s hesitation towards when they will begin cutting rates does not give[SS1] much encouragement to investors. On the other hand, the U.S. economy has proved resilient from a growth and job market standpoint. Additionally, the upcoming U.S. presidential election cannot be ignored. Historically, election years have been a positive for both stocks and bonds (as indicated in the chart). One thing to remember is something these charts do not indicate, which is the hightened market volatility during the months leading up to the election.
Whether it is inflation, a recession, or the upcoming presidential election, as investors we are always faced with data or events that could cause volatility in the markets; then top it off with anything that catches the market by surprise. Going back to our marathon analogy, picking one single event and attempting to change your portfolio to benefit from it, would be like training for a marathon by running one mile everyday. When the marathon comes around, you will be great for the first mile, but you will not be ready for the next 25.2 miles. The same goes for your portfolio, if you prepare it for a single event and ignore all the other things that could impact the market, your portfolio will not be invested for long-term success.
As we have always done, we are keenly focused on the long-term and we continue to follow the same investment philosophy since we first started our investment firm almost thirty years ago. With markets at or near all-time high water marks, we are constantly reviewing and evaluating client accounts and utilizing the same rebalancing methodology as we have done in the past. When an asset class is above our target based upon your target investment allocation, we sell shares of those positions that are over-weighted and use the proceeds to buy the positions that have become underweighted. By building and maintaining a long term well diversified portfolio, you position your portfolio to not only finish this marathon but many more to come.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio/financial plan review.