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Key Financial Market Takeaways from the First Quarter

  • Stock market performance remains incredibly narrow as a small number of stocks drive indexes.
  • Inflation remains elevated relative to the Federal Reserve’s long-term target.
  • The economy is strong as unemployment continues to be low and corporate earnings grow.
  • The potential lowering of the Federal Funds rate remains uncertain as timing continues to extend.
  • Bonds continue to offer competitive conservative returns. 

Key Market Positioning for the Remainder of 2024

  • Focus strategies on risk management and diversification, as broader investment approaches become more important.
  • Patience could be rewarded as 2024 could be the year for value stocks to lead.
  • Revisit bond exposure. Fixed Income yields are back, and bonds probably belong in your portfolio.  Look to extend average maturities before the Federal Reserve starts cutting rates.
  • Sector selection will be important when investor demand rotates from Big Tech.
  • Dividend paying stocks may see renewed interest as they can provide appreciation and income.
  • Remain focused on long-term benefits of investing and ignore sources of near-term volatility.

Investment Thematic Ins and Outs

Avoid in 2024:

  • Index Investing
  • Magnificent Seven(1)
  • Expensive Stocks
  • Utility Stocks

Opportunities in 2024:

  • Municipal Bonds
  • Patience
  • Risk Management
  • Regional Banks
  • Value Stocks

(1) Magnificent Seven is a recently coined wall-street term to define seven of the largest holding holdings within the Standard and Poor’s 500 Stock Index.  It is generally agreed that these seven stocks are: Microsoft, Apple, NVIDIA, Amazon, Meta, Alphabet, and Tesla

First Quarter Review

The first quarter of 2024 reflected a continuation of the trends that characterized all of 2023.  This was an incredibly narrow stock market.  A narrow stock market is defined by a small number of stocks having a significant impact on overall index returns.  Narrow markets often create an inaccurate reflection of general stock market performance.  Certainly, this was the case in the first quarter of 2024, as seven stocks drove selected index returns.  What may also surprise many investors is the once broadly diversified Standard and Poor’s 500 Stock Index is now dominated by just seven stocks.  Dubbed the Magnificent Seven, these stocks (Microsoft, Apple, NVIDIA, Amazon, Meta, Alphabet, and Tesla) comprise nearly 30% of the S&P 500 and 52% of the NASDAQ.

Figure 1: Magnificent Seven Weighting (By Index)

So, it came as no surprise that the indices that held these seven companies outperformed in the first quarter.  The S&P 500 returned 10.55% and the NASDAQ gained 9.32%.  Indices without these seven companies experienced a much less stellar quarter (MSCI EAFE: 5.83%, Russell 2000 Small Cap Index: 5.17%, and Emerging Markets: 3.35%).

Figure 2: Indices Returns

In other financial markets interest rates increased, the price of gold went higher, and a barrel of oil became more expensive during the first quarter.  From January to March, the yield on a ten-year government bond went from 3.88% to 4.20%, the price of a troy ounce of gold started at $2,062 and ended at $2,229, and West Texas Intermediate oil went from $73.11 a barrel to $84.55 a barrel.  What do these three things have in common? Inflation.  During times of inflation, investors demand higher yields, input prices increase, and skittish investors seek tangible assets.

The best development of the first quarter of 2024 was the release of 2023 corporate earnings (mostly occurring between mid-January and mid-February).  These reports came in strong as earnings growth (for companies within the S&P 500) exceeded 9% in 2023.  Approximately 90% of these announcements also exceeded analysts’ consensus estimates. 

Key Concepts for the Remainder of 2024

PATIENCE – Investors need to remain patient and stay diversified with exposure to multiple asset classes and an overweight to small-capitalized stocks and value stocks.  Most asset classes appear to be undervalued. The one asset class that is overvalued (large growth) also happens to be the most enticing, getting the most coverage on traditional and social media outlets, and continues to attract new purchasers.  While logically investors know that the same small group of stocks cannot maintain the recent parabolic trend, the urge to participate in the hottest sector is strong.  Now is not the time to cave.  As investors, we have to ask ourselves if we want to be known as the ones who invested in the expensive stock right before the collapse, or in the cheap stock right before the run.  The current stock environment presents the most critical point of investing in many years.  Ten years into the future we can either be remembered as the last ones to the old party or the first ones to the new party.  The difference is likely to be enormous.

BONDS – Bond returns are in excess of 5%.  Municipal bonds (where interest are tax-free) are approaching 4%.  For conservative investors, income dependent retirees, wealthy individuals looking for tax-advantaged returns, bonds should not be ignored.  The Federal Reserve has stated that they plan to lower the target Federal Funds rate.  Investors need to incorporate this message in their bond buying decision.  If interest rates are high now, and are expected to go lower in the future, when is the best time to buy? Probably NOW!

RISK MANAGEMENT – Don’t forget about risk. Recall that the S&P 500 is a market capital-weighted index; the index is near an all-time high largely because of seven stocks.  As the seven stocks do well, more investors (directly and through ETFs) want to buy more.  This increases the market capitalization of these stocks.  In turn, the algorithms must then purchase more of these stocks to maintain the proper weighting inside the indexes.  This creates a circular demand that “feeds” on itself, and everybody who invests in an index with the Magnificent Seven stocks looks like geniuses.  The risk management question each investor needs to ask themselves is: what happens when it goes in reverse?  What happens when the selling starts? What happens when the positive momentum turns to negative momentum?  If and when that happens, it will be painful for those investors who abandoned risk management.  Being able to “weather” sharp downturns in a portfolio does not depend on an investors action during a major selloff, it depends on an investors action before the selloff.   

D'Arcy Capital

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