First Quarter 2024 Review and Outlook

Written by Tim Rigby

The markets posted nice gains to start the year.  According to The Wall Street Journal, the popular stock indexes posted returns as follows:

 			                                                                             Quarter		    Year

The Dow Jones Average 5.60% 5.60%

The S&P 500 10.20% 10.20%

The NASDAQ Composite 9.10% 9.10%

Inflation exploded after Washington ratcheted spending upwards during and after COVID, so the Federal Reserve moved to slow the economy and inflation by rapidly raising interest rates in 2022 and 2023.  The risk to hiking interest rates is a full-blown recession but the economy avoided this and appears to be approaching the elusive “soft landing”. 

Instead of a broad recession, what we have seen is an earnings recession centered in small and medium sized companies. Large companies, particularly tech companies, have more pricing power and can raise prices to keep earnings expanding.  In the short run, this has made the individual stocks perform well, but the companies are so richly priced it could greatly increase your risk if you are a long-term investor and heavily concentrated in these positions.

As noted in our last newsletter, the abnormally high valuations for the “Magnificent 7” companies also pose risks for investors holding index funds as up to 50% of the most popular indexes are comprised of these seven stocks.

Many small and medium-sized companies first absorbed the higher inflation costs and then over time raised their own prices to recoup the higher costs (the other 493 stocks in the S&P 500).  Many endured this earnings recession and averaged 50% stock price drops from high to low over the last year or two – very remarkable! This bias toward the seven largest companies looks like it is beginning to reverse as market strategists appear to be predicting higher earnings for many companies as 2024 progresses.  Coupled with historically low valuations outside of big tech, we could see a pretty strong rally in the overall market.

The sharp rise in interest rates has helped reduce inflation quickly and the Fed indicated their next interest rate move is probably lower (though inflation isn’t quite at their 2% target).  Our feeling is short rates will probably fall over the next 6 months while longer rates will be the same or a little higher than now.  This should not only keep the economy out of recession, but it should allow earnings to grow across most companies and industries. 

As a result of the extreme focus on large technology companies, most diversified portfolios have underperformed the indexes the last year or two. Our focus is and always has been long-term results; the best way to consistently achieve that is to invest when things are underpriced (buy low, sell high).  Tech stocks have been the place to be but there will most likely be a rotation out of the popular winners currently, and into the historically underpriced rest of the stock market.  This rotation should allow diversified portfolios to once again outperform with lower risk than the indexes.  

Please call if you have any questions or concerns.  Spring is around the corner so enjoy the nice weather.

Tim Rigby