February 2024 Newsletter

Dear Clients and Friends,

The start to 2024 has been full of excitement with the main stock indices reaching new all time highs (something that hasn’t happened since 2021). As we enter the beginning of February, many folks are wondering what to do in this circumstance along with a divisive presidential election and potential rate cuts that are forecasted to happen throughout the year. Each of these items are important as we move ahead into 2024 and we will provide some information regarding each.

The S&P 500 now sits at 4,497 as shown below in the most searched-for and shared chart in finance media. 

Running into uncharted territory can lead to a natural unease, especially given our last writing about the Magnificent 7 stocks that have played an outsized role in the most recent performance. In the behavioral finance world, it’s well documented that investors have a psychological idea that what goes up must come down and therefore experience trepidation about maintaining a growth oriented portfolio allocation, or have higher level of anxiety about investing new dollars when the markets sit at all time highs.

While these feelings are completely normal and expected, it’s important to keep in mind that historically the S&P 500 (and other major domestic indices) experience all time highs about 80% of the time and the laws that govern the long-term shape of this index are those of growth and productivity. Market sentiment moves the market in the short-term, but thankfully economic output, innovation, and well run business fundamentals still rule in the long-term. With the average bull market lasting between 3-5 years, we believe investing at all time highs makes sense alongside a well thought out allocation strategy for everyone’s unique situation.

Next let’s turn to the question of the election year.

History is never a perfect predictor, but it can be helpful to bring context to the current situation. Below is a chart of election years going back to 1960 (the modern era of markets):

Election Years

In the last 15 election years, there have only been two that posted negative returns. The year 2000 was the first of three negative years following the “.com crash” and 2008 will live in infamy forever as the year starting the “financial crisis”. While these two undoubtedly were difficult, the other 13 years were very positive with all but 3 posting double digit positive returns. This positive performance is well researched with many factors contributing, but in general gestures in the direction that staying the course through the political uncertainty is the right approach (at least from a probability standpoint).

And while the Federal Reserve is an independent institution from the Treasury and Washington as a whole, the two often go hand in hand. Here is what we know from the most recent Fed meeting this week.

Federal Reserve

The Fed didn’t change short-term interest rates yesterday, nor did it alter the pace of Quantitative Tightening, but it did use both the statement and Chair Powell’s press conference to guide expectations for the path of normalization in the year ahead. 

Starting with yesterday’s statement, there were a number of changes from December, including the removal of text about tight financial and credit conditions being likely to weigh on economic activity, and the addition of new text that the “Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

And while inflation remains the central focus, the Fed highlighted that the balance of risks between the inflation and employment goals are coming into better balance.

This is understandable, given that inflation is trending down.  The Consumer Price Index rose 3.4% in 2023, versus a 6.5% rise in 2022, while unemployment has slowly crept higher.  But much of the improvement in last year’s inflation readings was due to energy, which has declined 2.0% in the past twelve months.  The Core CPI is still up a worrisome 3.9% from a year ago compared to 5.7% in 2022.

That said, Powell comments during his press conference sang a more confident tune.  He stated that incoming data has been in-line with what the Fed wants to see to start the rate cut process, and they don’t have reason to expect the positive progression of inflation data will shift in the months ahead.  The Fed’s reason for remaining on pause is that they simply want to see the trend continue for a longer period to build “greater confidence” they will hit – and sustain – their 2.0% inflation target. When asked if that confidence could come by the next meeting in March, Powell responded that he doesn’t think the committee will have broad confidence that soon, suggesting May is very likely to be the start of the cut cycle.

The market met these comments with negative sentiment initially, but if there is one true financial aphorism, it’s to never trust the intraday market movement on a Fed meeting day. Both the stock and bond market have bounced back today with longer term rates falling, indicating the market is still betting the Fed will move in March or May.

We hope this information is helpful and we encourage each of you to maintain discipline through a year that will bring new challenges, but also equal opportunities to the forefront of the investment landscape.

All the best,

Stephen, Dan, and Chris

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