Equity markets continued their run higher over the course of Q1, a positive trend that began towards the beginning of Q4 2023. Setting several all-time highs along the way. This despite lowering of expectation the Federal Reserve (the Fed) would begin a series of interest rate cuts as early as March of this year. The first rate cut in 2024 has yet to materialize as sentiment has again turned back to ‘higher for longer’ in terms of monetary policy. In the face of ‘higher for longer’ we then turn to what supported the market’s move.
First and foremost, Q4 GDP beat expectations expanding 3.4% and while not in that same neighborhood, is projected to exceed projections in Q1 when numbers are released later this month. We have discussed at length a continually robust labor market coupled with consumer spending as tailwinds in several preceding newsletters dating back to late 2022, so will not cover it again here.
It is worth mentioning, that despite a tick up in the Consumer Price Index (CPI) in December, the Fed’s preferred inflation gage, the Personal Consumption Expenditures Price Index (PCE) in fact ticked slightly lower.
Needless to say, we remain in an environment heavily dependent on the expectation of what comes next from the Fed. And will likely linger in that environment until we find ourselves much closer to their 2% target rate of inflation. Looking forward we firmly believe headwinds to equities to start to Q2 is a simple repricing of the number of perceived cuts, with potential being anywhere from zero to three in calendar year 2024. And all in the second half of the year if or when they materialize.
Repricing should subside, and continued late-cycle expansion within both the U.S. and global economies should pave the way for favorable equity returns over the course of the year.
In terms of the Tactical Allocation Portfolio (TAP) and the Sector Equities (SEC EQ) models both embraced a risk-on approach in November of last year and rode the recent trend higher. Providing positive rates of return in Q1 in line with the S&P 500 index. That said, a small amount of risk has been taken off the table in just the last two weeks due to our take on repricing of potential interest rate cuts resulting in a roughly -3.5% QTD return for the index.
‘Longer for higher’ has no doubt benefited our fixed-income investors as US Treasury yields on maturities up to 12 months remain above 5%. We will revisit in both May and November as maturities on Treasuries already purchased come due. And remain confident in our fixed-income model approach should the rate environment later this year make US Treasuries less attractive.
We look forward to reconnecting with each of you soon. And for anyone who missed it, a final welcome to the newest member of our team David Kurt. After spending 20 years in the Vail Valley as a Mortgage Loan Officer, he joined our Edwards, CO office in February. We’re glad to have him and wish him the best.
