2024 1st Quarter Overview

Jeffrey L. Stock, Jr., CFA, MBA, 2024-04-15

The first quarter of 2024 has delivered plenty of surprises and I think 2024 has plenty more instore.

Major indexes moved broadly higher through the first quarter with the Dow Jones (DIA 1) up 6%, S&P500 (SPY 1) up 10.4% and Nasdaq 100 (QQQ 1) up 8.5%.  Small Caps (IJR 1) noticeably underperformed, only up 2.4%.  Taking a look at the sectors, Real Estate (XLRE 1) was the only negative performing sector over the quarter.  Energy (XLE 1) was up 13.5% as oil continued a march higher.  Communications (XLC 1) was next largely boosted by META and GOOG (the largest components in the XLC ETF).  Financials (XLF 1) also continued its recovery from last year’s SVB crisis, up 12.4%, taking out its prior highs.  Industrials and Materials were also up significantly signaling confidence in a recovery in the US.

Interest rates were up during the quarter.  The US Yield Curve shifted up approximately .5% (2) when looking at maturities 2+ years out as markets digested higher inflation expectations and higher fed funds expectations.  Expected Fed Funds rates also shifted noticeably higher (3) over the quarter as markets digested the “higher for longer” narrative from the Federal Reserve and higher than expected inflation. We believe this is important because of the magnitude of the change: expected Fed Funds rates were higher at all points over the next 12 months, but looking to 2024Q4 and in to 2025Q1 expectations shifted up between .85% and 1%.  Looking to Corporate Bond Indexes, credit spreads came down and are at the tightest levels in 2 years (4).  Investment Grade Bonds (LQD 1, -.88%) and High Yield Bonds (HYG 1, +1.51%) both held up well through the quarter outperforming Intermediate Term Treasuries (IEF 1, -1.29%) and Long Term Treasuries (TLT 1, -3.70%). 

 

We believe treasury yields are important looking ahead.  Rates will often inversely impact PE Ratios (Price to Earnings Ratios) in equity markets.  According to Refinitiv DataStream (5), the S&P 500 has seen a 3% upward revision in Estimated Earnings Per Share over the quarter but an almost 8% increase in the Price to Earnings Ratio.  The estimated EPS growth this year is 11.26%.  This leaves the S&P 500 on the high side of forward PE ratios going back to 1985- higher than 88.6% of all prior weekly PE ratios.  The combination of a relatively high PE ratio and below average growth concerns us.  If rates rise (instead of go down as has being predicted since October) that leaves PE ratios vulnerable to pull back.

 

Given the way markets are positioned, we are looking to take advantage of the still high short term treasury rates.  Within equities we are looking for low multiple (PE) stocks,  high quality dividend payers and smaller cap companies.  Inflation is driving Federal Reserve decisions and with the price of oil going up we don’t believe inflation is likely to come down soon.  The war in Israel has the potential to become a much broader conflict and the situation in Ukraine is certainly not over.  For the time being data appears to indicate the US has moved away from recession risk but consumers are arguably slowing down based on quarterly commentary from major companies.  While markets have been relatively tame year to date, we expect elevated volatility if 10 Year treasury yields continue to rise.

Notes

  1. These are symbols of Exchange Traded Funds that are designed to represent the underlying indexes.  While you cannot invest directly in an index, you can invest directly in these ETFs.

  2. Source for treasury yield curve is Refinitiv Eikon, as of 4/1/2024

  3. Source for implied yields on Fed Funds Futures contracts: Refinitiv Eikon, as of 4/1/2024

  4. Source is St. Louis Federal Reserve, FRED system.  High Yield OAS Spreads represented by the ICE BofA US High Yield Index, BAMLH0A0HYM2.  Investment grade is represented by ICE BofA US Corporate Index, BAMLC0A0CM.  All data as of 2024.03.28.

  5. Refinitiv DataStream uses I/B/E/S estimates to calculate current and forward estimates on an index weighted basis.  This data extends to 1/1/1985 for the S&P 500.  All information related to forward EPS, PE (FTM) and implied growth are based on this data.  All data is as of 3/28/2024.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

 All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

 Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.