Q1 2024 Review & Outlook
by Chris Broderick, Research and Trading Director
The First Quarter: Strong Fundamentals Propel Stocks to New Highs
The momentum from the 2023 rally carried into the first quarter of 2024, fueled by an investor-friendly blend of steady economic growth, falling inflation, and expectations of Federal Reserve (Fed) rate cuts. The year kicked off on a less positive note when the December Consumer Price Index (CPI), an important inflation indicator, declined less than expected, indicating that inflation might not be falling towards the Fed’s 2.0% target as rapidly as hoped.
This led investors to delay their expectations for the first Fed rate cut from March to June, sending stocks into a brief dip early in January(1). However, the downturn was short-lived as better-than-expected corporate earnings and the Fed signaling an end to rate hikes revived investor optimism, propelling the S&P 500 to a new all-time high(2).
February and March saw further gains as fears of a resurgence in inflation eased, reinforcing investor confidence in a June rate cut. Economic and inflation data remained stable through the end of the quarter, with updated interest rate projections suggesting three rate cuts this year(3).
We thus begin the second quarter amid a positive macroeconomic environment marked by stable growth, declining inflation, and the prospect of Fed rate cuts. While this is undoubtedly a favorable setup, there are a few lingering concerns. Investor sentiment is becoming extremely bullish – a contrary indicator suggesting a trend reversal may be on the horizon. At the same time, weaker than expected retail sales and a slight uptick in unemployment indicate that the economic momentum may be slowing(4). And core CPI remains stubbornly above the target 2.0% level, posing a risk to the anticipated rate cuts.5 These factors underscore the importance of closely monitoring economic developments, as the market's high valuations and bullish sentiment leave it susceptible to a negative surprise.
So, while year-to-date market performance has been exceptional and the ongoing rally is supported by positive fundamentals, we can’t allow optimism to blind us to risk. We continue to focus on managing that risk in portfolio allocations in light of the potential of a setback due to overly bullish sentiment and high valuations.
Thank you for your trust and partnership. Please do not hesitate to contact your advisor with any questions, or comments, or to schedule a plan or portfolio review.
1 https://www.cnbc.com/2024/01/11/cpi-inflation-report-december-2023-consumer-prices-rose-0point3percent-indecember-higher-than-expected-pushing-the-annual-rate-to-3point4percent.html
2 https://www.bloomberg.com/news/articles/2024-03-01/us-stocks-amped-up-by-big-tech-better-than-expected-earnings https://www.wsj.com/economy/central-banking/fed-leaves-rates-steady-and-opens-door-wider-to-cuts-d10a107d
3 https://www.bloomberg.com/news/articles/2024-03-20/bonds-rally-after-fed-keeps-2024-median-rate-forecast-at-3-cuts
4 https://www.bloomberg.com/news/articles/2024-03-14/us-retail-sales-miss-forecasts-after-steep-drop-in-prior-month
5 https://paralleladvisors.app.box.com/v/Q12024EconIndicators
This material is provided for informational purposes only and should not be construed as investment advice. Different types of investments involve varying degrees of risk. Discussion or information contained in this presentation does not substitute personalized investment advice from Parallel or another professional advisor of your choosing. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of Parallel Advisors, LLC (“Parallel”). Parallel cannot and does not provide warranties nor representations as to the reliability or accuracy of the content it shares.