April 1, 2024

“To make money in stocks you must have the vision to see them, the courage to buy them, and the patience to hold them.”

Thomas Phelps

What a week and what a quarter, not an April Fool’s joke! The Markets (S&P and Dow) set all-time records highs. Here are the numbers. The S&P 500 flew up 10.2% the Dow Jones Industrial Average gained 6.5% the Nasdaq ended off a slight .05% for the week. Internationally, the FTSE 100 added .89%, and the MSCI-EAFE was up slightly .02% the 2-Treasury yield closed last Thursday at 4.628% and the 10-Year at 4.206.

So, what’s going on? The big one for me, which I will elaborate in my quarterly letter with the client performance statements, is, after 2 years, the Leading Economic Indicators (LEI) turned positive. The Federal Reserve, though it did not cut rates, gave strong indications that some are coming this year, and though inflation is still a major problem, consumer sentiment is significantly improving. Hence my theory that as the political and media establishment, but more importantly, the money men and women on Wall Street, seem to be pricing in a republican victory and a significant change in policy. At the risk of a political discussion, always a loser, the reality is it will significantly affect the economy and ultimately your investments.

As Jeffry Bartash of MarketWatch reported last week, consumer spending in the U.S. rebounded in February after a lull at the start of the year, suggesting consumers still have plenty of buying power. Household spending rose a solid 0.8% last month to mark the biggest increase in 13 months, the government said last Thursday. Outlays rose a smaller 0.2% in the first month of the year. Economists polled by The Wall Street Journal had forecast a 0.5% advance. Incomes rose 0.3% in February. Consumer spending is the main engine of the U.S. economy. Households have kept spending at a relatively strong pace despite higher interest rates for houses, cars, and other big-ticket items.

As Barrons’ Nick Jasinski reports, The Dow Jones Industrial Average and S&P 500 both finished a superlative first quarter at record highs ahead of the long weekend—stock and bond markets were closed for Good Friday. Both indexes are up in five of the past six quarters. The S&P 500, up 0.1% today, has gained 10.2% since the beginning of 2024—its best start to a year since 2019.  The important point is that kind of early-year surge has historically been a sign of more good things to come. Since 1950, when the index gains 10% or more in the first quarter, it has finished the year higher 91% of the time and averaged a gain of 6.5% in the remainder of the year. So, our optimism, despite the headwinds of inflation seem justified. Also, MarketWatch reported last week, the final reading of consumer sentiment in March rose to a 32-month high, as Americans expressed more confidence that inflation would ease and reduce the financial strain on households. With a broadening participation and good corporate earnings, the market has enough juice to move on, we expect some good movement in mid and small cap stocks and foreign markets offer some good value now. The broadening of the rally continued in March, with the S&P MidCap 400® up 6%, outpacing the S&P 500’s 3% gain.

The concern or bad news? Something unusual happened in the stock market this quarter: Both the S&P 500 and CBOE Volatility Index, better known as the VIX, rose. Meaning fear of a market correction or crash ticked up. This seems logical with what has been happening last year and this quarter. The fact that the VIX is rising while markets have shown few signs of weakness is one thing that makes the current situation so unusual, as noted by MarketWatch. But all things being equally cautious optimism is still the order of the day. The possibility that U.S. inflation won’t trend much lower from here is raising concerns that Federal Reserve policy makers are mistakenly clinging to prospects for three interest-rate cuts this year and may lose their credibility, which could trigger cross-asset volatility.

Those concerns are growing just as last Friday’s release of February data on the Fed’s preferred inflation gauge — the personal-consumption-expenditures price index, known as the PCE — showed prices still need to be tamed. However, Federal Reserve Chair Jerome Powell said the February personal-consumption expenditures data was “pretty much in line with expectations.” He noted it was good that there were no surprises in the report.

So, it will be with much pleasure to send out the first quarter performance reports, and wish all of you a most Happy and Joyous Easter season.

Mike