Market Momentum – Will It Stay Hot?

With the S&P 500 closing up positive on Friday 3/29/24, we can now claim a second consecutive quarter of double-digit market gains.  This back-to-back performance has not occurred in 12 years.  Impressive gains to say the least but that’s just a part of the story.  Q1 2024 was the best first quarter experienced since 2019.  And the S&P 500 has been up over 22% in the last 2 quarters (and over 27% since the bottom that we experienced in late October of last year).

2023, for the most part, was a technology-driven market.  If you back out the sizable gains produced by relatively small cohort of growth stocks (the “Magnificent 7”), the overall market produced fairly mediocre returns.  It wasn’t until the FED implied a change in policy intent and a pause on future interest rate hikes that the rest of the market (the other 493 companies of the S&P 500) started to claw back some ground.  And that ground, so far, has been maintained.

This year we continue to witness outsized returns coming from companies that will benefit from the application of Artificial Intelligence (AI).  Advancements in AI have pushed names like Microsoft, Meta, Amazon and Nvidia to new highs — as all of these companies should continue to see business model improvements & efficiencies from this technology.

So far this year, we are seeing market participation broaden.  Both energy and financials are up 12% year-to-date.  The communication sector has been up roughly 15% this year and the progress being made is not all relegated to just large caps.  The Russell 2000 (two thousand small companies) has recently hit it’s 52-week high.

With this backdrop, what are investors to expect going forward?  Will the same market leadership continue to drive performance?  And what happens if certain expectations that have been driving the markets to new levels do not occur?  Expectations may need to be adjusted given where we are now.

The aforementioned market gains present challenges for investors and advisors alike.  With history as our guide, it is unlikely that we will see the market continue to advance higher for the entirety of this year.  In fact, it is likely that we will see a pullback — especially if certain assumed conditions are stalled or outright postponed.

Some of the market performance so far this year is based upon the assumption that we will see interest rate cuts this year.  David Kostin, Chief US Equity Strategist at Goldman Sachs, foresees 3 rate cuts occurring this year (starting in June).  This interest rate policy change is anticipated by numerous investment firms.

Delaying interest rate cuts until later this year or even next would be unexpected and likely not well received by the markets.  GDP (Q4 2023) was up 3.4%.  Measures of inflation (CPI, PPI & PCE) have proven to be a little stubborn and falling short of the FED’s desired rate of 2%.  Goldman’s Kostin has a year-end price target for the S&P 500 of 5200 in this instance.  For perspective, the index closed at 5254 last Thursday (3/28/24).  Clearly, Goldman, just one of many firms that attempt to prognosticate the future, does not see much growth from here to the end of the year. Time will tell.

More persistent inflation, economic deterioration (recessionary pressures), earnings surprises, and/or an unaccommodated FED all present scenarios (catalysts) that could cause the markets to trend lower.  Market pullbacks are natural and often needed so that higher levels can be established in the future.  Valuations will adjust to economic conditions and the general environment.

Needless to say, investors staying diversified and keeping a long view through this period is very important.  As we remained encouraged by broader market participation, employment, consumer confidence and interesting opportunities in the debt markets (the bond market), we view any pullbacks of significance as potential opportunity. After all, an accommodative FED policy should benefit the capital markets overall going forward.