NORMAL’S JUST A SETTING ON MY DRYER
Lucidity Ledger — Insights for the Learned Investor
April 18, 2024
As we continue into the Spring season, we are reminded again that “Normal’s just a setting on my dryer” (as one of our older, "she's-seen-it-all" clients likes to say). To her point, there's been nothing normal about 2024 so far – Bitcoin, gold, and the stock market all at all-time highs through the end of the first quarter, a solar eclipse, the Francis Scott Key Bridge collapse in Baltimore¹, a sports-betting scandal², an impending and contentious presidential election only a few months from now, and who can forget about Taylor and Travis³?
While this leap year keeps us on our toes, we are committed to keeping you informed and engaged in these dynamic times.
Overall, our U.S. economy is doing well, with inflation continuing to drop. As a result, markets soared higher in the first quarter of 2024. However, at the time of publishing this on April 18, the second quarter of 2024 is off to a rough start – while the S&P 500 was up over 10% in Q1, we've given back just over -4.50% in these first 18 days of April. Below is a summary of some of the main drivers influencing us in 2024.
Economy
The U.S. economy is strong largely due to robust employment numbers and expectations for interest rates to come down later this year.
On the employment front, jobs are available, companies are hiring, and unemployment is still historically low. While layoffs have increased a bit since January 2021 (primarily in the technology, government, and finance sectors), so has hiring – as of March, our U.S. unemployment rate remains below 4%.
Inflation has continued to fall from its recent whopping peak of 9.1% last summer, leading investors to be initially optimistic that the Federal Reserve ("Fed") will cut rates several times in 2024. That optimism was felt in the ensuing market rally through the end of March. However, April's Consumer Price Index ("CPI") data showed that inflation crept up slightly in March, landing at 3.5%.⁴ While much better than the peak of 9.1% a few months ago, 3.5% is still considerably higher than the Fed's target of 2%.
The following two charts illustrate our recent inflation trend by tracking the prices of pantry staples over the last five years. Across the board, you'll see that prices are no longer at their peak but are still very elevated from their pre-COVID levels on a percentage basis.
This recent CPI data showing still-persistent inflation and the resulting fear that the Fed will keep rates high for longer than initially expected is one of the drivers of April's market stumble (along with geopolitical tensions around the globe culminating with Iran's latest attack on Israel). A recent quote from Saira Malik, CIO for the global asset manager Nuveen, summed up her firm's U.S. rate outlook with an analogy to Newton's first law of motion:
Our “higher for longer” rate hypothesis can be seen as a financial case study in Newton’s first law of motion, which states that an object at rest (in this case, Federal Reserve rate policy) will remain at rest, and an object in motion (the resilient economy) will remain in motion, unless acted upon by an unbalanced force. For now, the force of inflation appears to be in balance, not unbalanced, given the Fed’s rate stance and U.S. economic strength.”⁵
While interest rates do have to come down eventually (and not too far in the distant future, or else the U.S. won't be able to afford to pay the interest on our own debt), our latest inflation data indicates they may have a slower decline than both investors and borrowers are hoping for.
In global economic news, the Bank of Japan (BOJ) announced in March that it is raising interest rates for the first time since February 2007 and is finally ending its negative-rate monetary policy that began in 2016. Like the U.S., Japan has had a 2% target inflation rate for some time. However, unlike the U.S., they have been in a deflationary economy since the 1990s.⁶ March 2024 marks the first time since 2007 that Japan's inflation rate has exceeded 2% for a prolonged period, finally prompting the BOJ to raise their overnight-lending rate out of negative territory. To put Japan's job market in perspective, Japan's largest companies have agreed to increase workers' salaries by 5.28% – pressured by rising prices and a shrinking workforce, this is Japan's most significant wage hike in more than thirty years.⁷
Markets
U.S. equities have done well overall in recent months, particularly with the S&P 500 being lifted by recent mega-performance in tech stocks primarily due to the rapidly expanding area of Artificial Intelligence (AI). Now that the "FAANG" acronym has been replaced by the newly coined "Magnificent Seven", it remains to be seen how these seven tech companies (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) will perform going forward.⁸ Five of the seven have done tremendously well this year, with NVIDIA leading the pack at a whopping 73.6% growth in these first 106 days of 2024. Two of the seven, Apple and Tesla, have each taken a stumble this year, with Apple being down just over -10% and Tesla being down -35% through April 15. Apple's recent correction is mainly due to an anti-trust lawsuit brought against them in March by the U.S. Department of Justice and several U.S. states all complaining against Apple's alleged monopoly of the smartphone market. Tesla's drop is due to recently missed production estimates and falling sales amongst the growing competition in the electric vehicle market, resulting in an April announcement that they are laying off 10% of their global workforce.
While not part of the Magnificent Seven, Boeing has had a rough start to 2024 and is another example of a tried-and-true household name suddenly being down -35.6% year-to-date. In Boeing's case, the sharp decline is due to recent whistleblower complaints about poor safety protocols during manufacturing and, even worse (perhaps proving the whistleblower's point), several instances of parts falling off of their airplanes mid-air.⁹ These examples remind us that there will always be disruptors coming around the bend that can't be predicted, and highlight the benefit of being invested in a diversified portfolio rather than owning just a handful of what may be today's winners turning into tomorrow's losers.¹⁰
International and emerging market equities are also consistent, with valuations remaining attractive compared to U.S. equities—international and emerging market stocks remain on sale compared to U.S. stocks. Much of the same headwinds affecting the U.S. are also affecting countries around the globe, including unaffordable prices, supply chain issues that are persisting in our post-pandemic world, and uncertainty around geopolitical issues.¹¹
U.S. bond markets remain status-quo, with investors benefiting from higher yields while waiting for interest rates to fall. Year-to-date through March 2024, U.S. fixed income indices are hovering between -0.78% to +1.47% depending on the sector.¹² We believe now is an excellent time to own a diversified fixed income portfolio that is intentional about duration and credit quality, and that is positioned to benefit once interest rates start to decline.
Other asset classes have climbed recently as well. Year to date through April 15, gold is up 15%, Bitcoin is up 50%, and crude oil is up 19%.¹³ Some of this may indicate investors' uncertainty about the future, where fear assets like gold (and perhaps Bitcoin, as a more speculative hedge) are thriving in the face of high inflation, high interest rates, and low confidence in leadership both at home and abroad. Commodities like oil remain high in price due to supply concerns and the same geopolitical risks affecting other markets as mentioned previously.
Takeaway
U.S. equity markets have had strong returns through March 2024, reinforced by investors' confidence that future earnings will continue to rise. We remain in wait-and-see mode for the Fed's next interest rate move (the Fed meets again at the end of April/beginning of May); most analysts expect rate cuts to begin no sooner than in the second half of 2024. We expect a choppy market as we get closer to our November presidential election while remembering that, historically, election years have little impact on long-term returns.
All this information doesn't change our broad advice to you, the reader—instead, it reinforces it. For short-term financial goals, high-yield savings accounts are the place to be, allowing you to earn some interest while you're waiting to spend your cash.¹⁴ For monies set aside for long-term goals like retirement, it's important to tune out the current noise and keep a long-term perspective.
To meet your long-term goals, a personalized, non-cookie-cutter investment strategy that is diversified, low-cost, tax-efficient, and risk-appropriate for your situation is integral to your long-term financial success. We also cannot stress enough the value of having a comprehensive financial plan that works with your investment strategy. Your investment portfolio should not merely exist in a vacuum; it should be tailored and adapted over time to meet your current and future goals. A dynamic financial plan, coordinated with an investment strategy customized to your situation, will help you meet your goals while insulating against the risks of ever-changing markets.
¹ Did you know this is not the first time a major bridge in the U.S. has collapsed? It happened in Minneapolis, too. https://www.cnn.com/2024/03/27/economy/minneapolis-bridge-collapse-baltimore-lessons/index.html
² Shohei Ohtani is now the highest-paid U.S. baseball player after signing a recent $700,000,000 contract with the Los Angeles Dodgers. His interpreter thought Ohtani wouldn’t miss a few million – he was wrong.
https://www.cbssports.com/mlb/news/shohei-ohtani-interpreter-scandal-explained-everything-we-know-as-prosecutors-say-ippei-mizuhara-stole-16m/
³ If you need to know who Taylor and Travis are, ask anyone ages 5 to 95 and they'll tell you. Whether or not their romance makes it to the playoffs remains to be seen. In the meantime, Swiftonomics – yes, that’s a word.
https://www.newsweek.com/super-swift-economic-impact-taylor-swifts-eras-tour-1858678
⁴ https://www.bloomberg.com/news/live-blog/2024-04-10/us-cpi-report-for-march
⁵ CIO Weekly Commentary, April 8, 2024, www.nuveen.com
⁶ Deflation occurs when the prices of goods and services decrease (as opposed to inflation, which occurs when prices increase). Prolonged periods of deflation lead to slower economic growth, increased unemployment, cash hoarding, and reduced consumer spending.
⁸ https://money.usnews.com/investing/articles/magnificent-7-stocks-explainer
⁹ https://www.cnn.com/2024/04/10/investing/boeing-safety-problems/index.html
¹⁰ This is not to say Apple, Tesla, or Boeing are going anywhere – lawsuits are fought and settled, nimble companies adjust to changing conditions, and less-nimble companies often have leadership changes that eventually lead to righting the ship. Nonetheless, disruptors can happen to big-name, longstanding companies and usually are not noticed on the horizon until it is too late to change course. (Remember Kmart, Sears, and Circuit City? All were household names for decades – until they were not.)
¹¹ At last count, we have the Russia-Ukraine war, the Israel-Palestine war, the China-Taiwan conflict, and the upcoming U.S. Presidential Election in November. It also remains to be seen how Iran's April 13th attack on Israel will play out. For all of these, the world is watching.
¹² Talking Points, April 4, 2024 (with data through March 2024), www.ftportfolios.com
¹³ https://www.finance.yahoo.com
¹⁴ https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/
This commentary is only general information and should not be construed as investment, tax, or legal advice. You should consult your own investment, tax, and legal advisors before engaging in any transaction. Past performance of any market results is no assurance of future performance. The information presented within has been obtained from sources believed to be reliable but is not guaranteed.
Do you have questions about applying these ideas to your unique situation or about anything else related to money, investments, or financial education? We are happy to help get you on track! Contact us for a complimentary, no-obligation conversation.