listen to this article2024 has been the best start for the stock market since 2019, with the S&P 500 index topping the 5,000 level for the first time and returning 10.6% in the first quarter.
Despite some cracks, the economy is recovering and consumer confidence is rising. However, the picture for bonds is less rosy as the Bloomberg Aggregate Bond Index fell -0.8% and investors continue to grapple with changes in the expected path of interest rates. The yield inversion period for U.S. Treasuries is also the longest in history, surpassing the inversion period in the late 1970s.
In this environment, it has become increasingly clear that investors need to pay close attention to government policy, perhaps even more than to the actual business operations of the companies in which they invest.
Under this system, where large fiscal deficits and monetary policy uncertainty continue, the words and actions of policy makers have a tremendous impact on financial markets. With Congress recently passing a $1.2 trillion spending bill and the Federal Reserve expected to cut interest rates three times this year, it's no wonder the market is expecting more growth. . These influences and the rise of artificial intelligence (AI) will make it difficult to bet on the stock market, at least in the near future.
Our concern is what happens if the Fed has to keep restrictions in place for a longer period of time, or what happens if it ends up having to pay for the spending. The fact that the value of gold and Bitcoin also hit new all-time highs this year may suggest that policymakers cannot control interest rates, inflation, and currency all at once.
For better or worse, the federal government appears to be using all its weapons to prevent a recession before the general election, and as a result, the probability of a recession decreases and we hope for a soft landing.
But the cost of forcing a recession is likely to come in the form of higher inflation and a devaluation of the US dollar in the coming years. While there has been significant progress towards inflation since the 2022 surge, inflation is known to come in waves. The only conceptual antidote to the threat of inflation may be to improve productivity, which is one of the promises of AI. But before relying on that result, we need to see more conclusive data. Securities offered by a Registered Representative through Private Her Client Services, member FINRA/SIPC.
Advisory products and services provided by Investment Advisor Representative through Stonebridge Financial Group, LLC, an SEC Registered Investment Advisor. Stonebridge Financial Group, LLC may do business in states in which it is registered, exempt from registration, or excluded from registration.
Private Client Services and Stonebridge Financial Group, LLC are unrelated entities. Our economy has been supported by the labor market and consumer spending. Growth in non-farm employment has been steady in recent years, and although the unemployment rate has risen slightly, it remains remarkably low at 3.9%. As a result, average consumers are spending more than ever before, but low-income households are showing signs of strain, as credit card debt nears record highs and delinquencies are on the rise. may be seen (see graph below).
Some economic sectors that have already shown weakness, such as manufacturing and housing, appear to have bottomed out. If interest rates remain high, the housing market may remain relatively cool for some time, but existing home sales and housing starts are recovering slightly.
It's still too early to comment on the presidential election, but the odds of Trump or Biden winning are close to 50-50. While there are no historically large differences in overall market returns when either party is in power, policies such as energy, health care, and financial regulation can have sector-level effects. Additionally, the S&P has performed well in every presidential reelection year since his 1944, which can be considered evidence of the fact that the current administration tends to support the economy.
Regardless of which party wins the election, the trend toward deglobalization is expected to continue. The effects of this are likely to become even more apparent in the coming years in the form of increased defense spending, increased business costs, and supply chain difficulties. These factors, along with recession-avoiding policies in many major countries that are holding elections this year, could lead to inflation.
investment allocation
While market participants have expanded beyond technology and telecom stocks to include major stocks, concerns about concentration risk with index and growth-based investing remain. As shown below, if “Magnificent 7” were its own sector, it would be the largest, but the sector would be very heavily weighted when revenue is taken into account. As such, we remain value-inclined, with a particular focus on high-quality dividend growth companies.
Dividend growth companies have historically outperformed securities offered by registered representatives through member FINRA/SIPC's Private Client Services. Advisory products and services provided by Investment Advisor Representative through her Stonebridge Financial Group, LLC, an SEC Registered Investment Advisor. Stonebridge Financial Group, LLC may do business in states in which it is registered, exempt from registration, or excluded from registration. Private Client Services and Stonebridge Financial Group, LLC are unrelated entities. We have a rate hike cycle where the value has exceeded inflation every decade since the 1940s.
The nature of being underweight on Magnificent 7 also reduces the size tilt, making us attractive to small-cap valuations. However, we are hesitant to take on too much additional beta from the bottom of the market.
Although our international reputation is very positive, we are cautious in the short term due to continued geopolitical uncertainty. We believe that managers who can select the right markets and avoid significant risks will continue to be important. On fixed income, we remain underweight in duration given the attractive yields and safety at the short end of the curve, but we are gradually starting to extend it. If the yield curve steepens more dramatically, we may extend the duration further. We are also underweight credit as spreads have tightened significantly.
Finally, we remain proponents of holding alternative asset classes that can provide diversification and uncorrelated sources of return during times of uncertainty.
Charts and research provided by Strategas Research Partners, LLC and JP Morgan Asset Management, Inc.
The content discussed is for general/informational purposes only and is not to be construed as tax, legal, or investment advice. Information has been collected from sources believed to be reliable, but please note that individual circumstances may vary and information should be relied upon in conjunction with individual professional advice . Past performance does not guarantee future results. Diversification does not protect against loss. Opinions and predictions expressed are solely those of the author and may not necessarily occur. This information is subject to change at any time based on market and other conditions.
