Quarter Review

How about a little Jeopardy trivia to start off our quarterly market update? If you are not familiar with the popular gameshow, a contestant is given the answer and must come up with the question. So here it goes. The answer: The fourth quarter of 2021. Cue the Jeopardy music in your head as you think of the question. If you came up with the question, “When is the last time we have been able to write about new all-time market highs?” you would be correct!

Yes, the first quarter of 2024 brought new all-time highs in U.S. stock market indices for the first time in over two years. After an inflation-induced bear market in 2022 and a resilient market in 2023, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all recently achieved new all-time highs, with both the S&P and Dow closing the quarter at all-time highs.

There are several contributing factors to recent increases in stock prices. The economy has been far more robust than many expected in the face of inflation and rapidly increasing interest rates. Recent data shows the U.S. economy grew at a rate of 3.4% in 2024 while consumer spending, which accounts for nearly 70% of the U.S. economy, was up 3.3% over that same timeframe.

The enthusiasm and recent developments around artificial intelligence, or AI, has also helped spur on the markets. Investors believe further advancements in this technology will drive new efficiencies, which help improve corporate earnings and increase stock prices.

But perhaps one of the biggest drivers of markets over the last few years comes from inflation and interest rates. If increasing inflation and interest rates spooked markets in 2022, lower inflation and expectations of lower rates in the future have been a boon to stocks over the last several quarters.

The Federal Reserve’s (Fed) preferred measure of inflation peaked at 7.1% in June 2022 (other measures showed it peaked at 9.0%). The most recent data as of February showed inflation has slowed to 2.5%, nearing the Fed’s target of 2%. As inflation approaches the Fed’s inflation target, investors, and the Fed itself, are anticipating lower interest rates. All other things equal, lower rates tend to benefit stock prices as the cost of capital is reduced for companies.

If we think of a well-diversified portfolio including both stocks and bonds, higher rates have also provided more yield from the bond side of a portfolio. Higher bond rates should support a more normalized bond market going forward compared to what we experienced when rates were near zero and the Fed began aggressively increasing rates.

With equity markets near all-time highs, one might be tempted to think this is a good time exit stocks, or at least a poor time to enter the markets. After all, aren’t we taught to buy low and sell high? We recently published a Podcast titled “Financial Myth Busters” where we tackled this very topic, among many others. This chart from JP Morgan has been making the rounds in our office lately and is somewhat mind-boggling. They found that investing at all-time highs was not a major detriment to longer-term returns. In fact, their data shows, on average, only investing on days when markets achieved all-time highs outperformed investing on any random day. Wow! Now, I’m not suggesting one should only invest on days where markets make new highs. However, as Nick mentioned in last quarter’s market update, good years in the market tend to cluster, and new highs have historically led to more new highs.

This chart is not meant as a prediction of where we think markets will go in the short-term. Rather, it is a reminder that stocks have a strong upward bias over the long-term regardless of when one invests. I mentioned the word “resilient” earlier in this letter, and that is certainly a word you can apply to the stock market. Headlines around day-to-day market moves, the economy, elections, geopolitics, and the like can cause panic and worry, and markets can be volatile in the short-term. The markets have seen it all including world wars, a depression, inflation, bubbles (or what Alan Greenspan referred to as “irrational exuberance”), terrorist attacks, a financial crisis, a pandemic, and about everything in between. In an election year, it’s also a good reminder that markets have survived anyone’s most despised and most beloved president. Through it all, investing in a well-diversified portfolio of stocks has historically proven to grow wealth over a long timeframe.

Ultimately, we believe investing starts with a plan. The appropriate asset allocation varies by an individual’s or household’s goals, timeframe, and risk tolerance. Diversification, rebalancing, and investing in stocks for the long-term is a successful time-tested, proven strategy. We adjust our strategy not to the markets but to our goals. As such, please let us know if there have been any changes in your financial situation or investment objectives. Also please inform us if you wish to modify existing restrictions or impose new restrictions on the management of your account(s).

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