Q1 2024
Dear Client,
We hope you have had a pleasant start to the year and are enjoying the budding signs of spring! We have been busy with last-minute tax reports and IRA contributions for many of you. If you still would like to make a retirement contribution for 2023, we are getting down to the last few days it is possible, so please reach out ASAP. Also, as always, if you would like to discuss your accounts or have experienced changes in your financial situation, please let us know. We are happy to make time to chat or meet.
The rally that began in the fourth quarter of last year continued into the first quarter of this year. We have been surprised at the strength and duration of the move. As ever, it seems the pendulum swings too far in either direction and leaves us wondering when there will be a move back to the center.
The index numbers for the quarter are as follows (calculated from wsj.com/market-data):
S&P 500 change: 10.73% Q1
S&P 500 Equal Weight Index: 7.93% Q1
Nasdaq Composite change: 10.12% Q1
Nasdaq Composite Equal Weight Index: 6.33% Q1
Dow Jones Industrial Average change: 5.97% Q1
Ten Year Treasury Yield change: 5.97% Q1
Crude Oil (WTI Front Month Contract) change: 15.98% Q1
Gold (GLD ETF) change: 7.46% Q1
The largest components of the indices once again took the lead resulting in the market-capitalization-weighted indices outperforming the equal-weighted indices. For the Nasdaq, this reversed the trend during 2023 of the top 10 representing sequentially smaller portions of the overall. In other words, the biggest got bigger and the indices got more concentrated during the quarter. We see two sides to this phenomenon:
1. The concentration makes the index levels/gains fragile and dependent on the continued performance/outperformance of those few stocks.
2. The seeming overvaluation (high P/E) of the indices is largely a result of those few stocks, and the valuation of the equal weight index is actually pretty reasonable*.
Following from those two sides are several lines of thought ranging from some real concern for anything that might destabilize the top few, to the overall market potentially being able to maintain current levels and/or grow into the valuation as “the other 490” increase earnings and/or valuation.
In terms of the changing prices of commodities, there are real world as well as economic inputs which can sometimes confuse the message for our purposes. The strength in the price of gold and oil during the quarter had many inputs and possible explanations. However, in the case of those two commodities, we think it is reasonable to interpret that while the change is not a clear sign of too much inflation, it is at least a clear sign that there is not current anticipation of too much disinflation.
We ended 2023 with the market mistakenly assuming the Federal Reserve would be cutting the Fed Funds Rate aggressively starting in Q1 of 2024. This was at least part of the justification for the rally in Q4 23 and the beginning of Q1 24. We never believed there was justification for 5 or 6 rate cuts to be anticipated and thus far we have been correct. The current expectation has been ratcheted down to 2-3 cuts in 2024. We think this may still be too high. Simply put, we think the potential cost of cutting rates too soon (potentially allowing inflation to run back up and become more entrenched) far outweighs the benefits, and it seems the Fed governors at least partially agree. This is especially true as the economy seems to be doing just fine at the current levels of interest rates.
The list of geo-political concerns just keeps getting longer and more depressing. Rather than delving into all the headlines we all see each day, we’ll just say that none of the valuations or market prognostications will matter if there is a “big event”. In that case, we will reassess and make changes accordingly. In the interim, we continue to see cash and bonds as ballast and protection from market fluctuations, as well as dry powder if opportunities arise.
We are moving forward with our usual healthy skepticism of all things, especially those things that seem to be working out just right. At the same time, we will maintain our balance and try to make sure we all enjoy the benefits as long as things are going well.
In any case, we hope you all enjoy the renewal and rejuvenation of spring and let us worry about these sorts of things.
Take care, Bo and Lesley
*RSP equal-weight S&P 500 index ETF currently has a P/E of 17.87 vs. the SPY S&P 500 cap-weight index ETF P/E of 21.73. Both according to www.morningstar.com.
