1st Quarter Market Update

As the first quarter ends and March Madness brackets are inevitably busted, let's take a quick look at how the economy and markets have performed to start the year and what could be on the horizon for 2024.

Economy

Over the last couple of years, widespread expectations of an economic recession have followed the steepest interest rate hikes in the last 40 years. This was a response to rampant inflation that spiked in 2021 and peaked at 9.1% in mid-2022. However, the U.S. economy has avoided recession thus far, remaining resilient despite the highest interest rates in the last couple of decades.

That trend seems to be continuing into 2024. Real gross domestic product (GDP) increased at an annual rate of 3.4% in the 4th quarter of 2023. As of its March 26 update, Atlanta Fed's GDPNow indicator for the 1st quarter of 2024 was also positive, projecting 2.1% GDP growth. This continued growth is a welcomed sign as CPI (inflation) has dropped closer to a sustainable rate and was recently at 3.2%.

Despite soaring prices in groceries and restaurants, consumers have continued to spend and drive the economy after a strong holiday season in 2023. Personal income and expenditures have both risen to begin 2024. This will be an area to monitor moving forward, as personal consumption drives almost 70% of GDP.

The unemployment rate ticked up to 3.9% in February. Zooming out, unemployment has now been below 4% for 24 straight months, the longest stretch since the 1960s. A slight increase in the unemployment rate could lower inflationary pressures and buoy the Fed's decision to cut rates.

The Fed's short-term rate currently ranges between 5.25% and 5.5%, a 23-year high. Coming into 2024, the market expected six rate cuts this year. These expectations have been lowered as inflation was firmer than expected in January and February, and the U.S. economy remains resilient to higher rates. The Fed is still forecasting three rate cuts in 2024, which would put the Fed funds rate between 4.5% and 4.75% by year-end.

Bottom line: The U.S. economy is solid, despite the wild ride over the last few years.

Markets

Market movements are often highly correlated to the economy but don't always move in step with each other. It is always interesting to watch how markets react to economic changes over time.

Equity markets are off to a hot start to 2024, continuing the solid gains we saw in 2023. The S&P 500 index has climbed about 10% in the first three months of 2024 after gaining over 26% in 2023. Investors have celebrated the U.S. dodging a widely anticipated recession in 2023. The U.S. appears to be on track for a "soft landing," where we can bring inflation back to normal levels without raising interest rates too aggressively and tipping the economy into a recession.

As we look forward to the rest of 2024, stock returns are unlikely to continue at the same pace we've experienced over the past 15 months. Investors anticipate interest rates falling over the next year. Lower rates are a positive sign for stocks long-term, as companies incur fewer borrowing costs that erode earnings and shareholder value.

A potential headwind is if the recent stock rally has been pricing in future rate cuts, then those cuts don't materialize, and rates remain higher for longer than investors anticipate. In that case, stocks must see increased corporate earnings to justify current and higher prices.

Conclusion

While we may not be able to rely on a 10%-per-quarter pace from equities, there is still much to celebrate in how far we've come from peak inflation in 2022 and the economy's strength in early 2024.

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