March Private Client Letter
/March 2024 Private Client Letter
Equity markets in the U.S. continue to press higher. Less than a month ago, the S&P 500 crossed 5,000 for the first time in its history and since the low last October, the index has been up over 1,000 points. Semiconductor manufacturer Nvidia reported a blowout fourth quarter earnings report and optimism over artificial intelligence keeps pushing stock indices to all-time highs.
Every bull market has a theme associated with it and the major characteristic driving stocks during this bull market has been any association to artificial intelligence. It is no coincidence that the NASDAQ bottomed out in 2022 less than a month after the launch of ChatGPT.
This has led to a very narrow bull market in which most of the gains have been driven by only a handful of stocks. Any broadening of the rally to include a growing number of names has yet to materialize in 2024. In fact, the S&P 500 Equal Weight Index underperformed the market cap weighted index by a wider margin in the first two months of this year than it has in any other year since at least 1990 (BESPOKE).
Financial conditions have eased considerably over the past four months and investor expectations for the Fed to begin cutting interest rates remain high. The historical perspective relative to looser financial conditions is quite positive for equity performance. With the S&P 500 having already rallied over 20% since October, we now face the question of whether the market has already priced in the benefits of improved financial conditions.
There remains plenty to worry about in the economy. The U.S. Leading Economic Index (LEI) fell further in January marking the 23rd straight monthly decline and now just one month short of setting a record. Weekly hours worked in manufacturing continued to decline and the yield spread remained negative. Still the Conference Board, which produces the LEI, has reversed its earlier forecast of recession, and now only sees economic activity “slowing to near zero” over the second and third quarters.
Retail sales have declined in three of the past four months and the U.S. manufacturing sector contracted for the sixteenth consecutive month in February. Housing starts and completions have dropped sharply while new home sales have been down 5.3% in the past four months. Durable goods orders also fell sharply to start 2024 and were revised lower for prior months.
The labor market appears to be holding up with the unemployment rate hovering around 3.7%. Taking a closer look at the data, however, we see the hours worked measure down while layoff numbers are rising. Also, U.S. corporations appear to be experiencing some weakness in earnings momentum. According to BCA Research, nearly three quarters of the companies that have offered first quarter guidance have guided lower. This level is higher than both the five and ten-year averages.
The market is very overbought in the short term and a near-term pullback can happen at any time. Still the momentum has been impressive suggesting further gains are possible before any consolidation begins. Our view is that volatility is likely to pick up on a 6-to-12-month horizon as the economy slows further and persistent inflation results in far fewer rate cuts from the Fed than the market currently expects.
While the “soft landing” camp has grown in recent months, we remain skeptical. We believe there is still a 30% chance we will see a mild recession this year and investors should not be complacent. Even mild recessions can produce large drawdowns in equity prices. One such example would be the 2001 recession, which ranks as one of the mildest on record. Stocks fell by 49% in that downturn largely because they were overvalued when the economy began to contract.
As always, thank you for your continued confidence in our abilities to help you navigate the many challenges associated with growing and protecting your wealth.
John E. Chapman
Chief Executive Officer
Chief Investment Strategist
