Market Data for the Quarter Ending March 31, 2024:

  • S&P 500 Stock Index: 5254, up 10.1%
  • Ten-year Treasury Note Yield: 4.20%, up 0.33%
  • Gold: $2,238 per ounce, up 8.0%
  • Oil: $83 per barrel, up 16.9%

The first quarter of 2024 began with an explosive move in many of the massive and glamorous growth stocks associated with the mania in Artificial Intelligence (“AI”) that led the market in 2023. As the quarter progressed, however, the rally broadened to other sectors of the stock market as investors came to believe that 1) an economic recession was unlikely, and 2) the Federal Reserve would NOT rain on the market’s circus parade. Consistent with investor belief in a stronger and more inflationary economy, commodities and bond yields were both solidly higher in the quarter.

While we are happy to see the rally in stocks move beyond the concentration in mega-cap growth, speculation remains the market’s dominant theme. When we say speculation, we mean stock prices are driven primarily by liquidity, narratives, and momentum, not any sort of reasoned appraisal of what companies are worth. For instance, the broadening of the rally from a growth focus had very little to do with an appraisal of relative valuations, but rather a change in the market’s narrative from “you can never lose money owning Big Tech stocks” to “the economy is strong and the Fed is going to keep things humming, so buy everything in sight.”

While such valuation-insensitive speculation will inevitably end in a reckoning for its participants, we do not believe the reckoning is imminent. We estimate that the factors driving the rally, principally high levels of liquidity and a strong economy, will remain in place at least up until the November Presidential election. At that time, there is the potential for significant governmental dysfunction if not outright political violence. While we cannot quantify this risk, we feel it would be naïve not to acknowledge its existence. (A major regional war such as one between the United States and Iran could also deliver a severe shock to markets, although as with political risk, it is difficult to quantify.)

Beyond the election, we think the greatest risk to the rally is price inflation reaccelerating and moving back above 4% (the current level is approximately 3%). Such a development could elicit a policy response from the Federal Reserve that would reduce the high level of liquidity (supply of dollars in the banking system) the stock market has come to rely upon. This is precisely what happened during 2022, which saw elevated market volatility and significant losses in popular, high-flying technology stocks. That having been said, we see inflation risk as being more likely of an issue for 2025 than the remainder of 2024.

Speaking of popular technology stocks, we believe they are threatened by a sector specific risk related to a bursting of the AI bubble. Enthusiasm for the technology has run well ahead of its actual capabilities, therefore a major price correction is almost inevitable in the months ahead when excitement for the technology does not result in a meaningful improvement in technology companies’ profitability. Nvidia is the one company that has undeniably benefited from the current mania in AI, but the explosive improvement in its profitability over the past year is unlikely to be sustained once enthusiasm for the technology runs into the limited profitability impact described above. Such an outcome could put a temporary halt to the overall market rally but would likely result in a benefit for your portfolios held with us, which have been starved of funds by the mania in technology stocks.

For the remainder of 2024, we see the stock market, as represented by the S&P 500 stock index, trading in a range of 4600 to 5600. It finished the first quarter at 5254. While the macroeconomic backdrop is conducive to continued gains for stocks, measures of investor optimism are at historically extreme levels of euphoria. This is an inherently fragile condition, so episodes of heightened volatility cannot be ruled out despite the multitude of factors working in the market’s favor.

As always, we appreciate your business and the confidence you have placed in us. Please do not hesitate to contact us with any questions you may have regarding your investments.