2024 First Quarter Financial Review

2024 started with a continuation of the stock market advance which began following the market lows of October of 2023.  The S&P 500 gained 10% in the first quarter.  This represents the best Q1 start since 2019.  Any weakness in the stock market was limited to only a few days where investors bought the dips which drive the markets higher. This sent the S&P 500 to 22 all-time highs. The Nasdaq index also advanced strongly with a 9% gain, again setting new records for the index.

Many commentators attributed the market gains to the dominant stocks titled the “Magnificent Seven” those being (Microsoft, Tesla, Alphabet, Meta formerly Facebook, Nividia, Amazon and Apple.)  However, it wasn’t just the tech mega stocks that participated in the market rally, but a broad participation of a wide variety of stocks.  All but one of the 11 sectors of the S&P 500 sectors rose during this period.  The exception was real estate.  Even the small-cap companies measured within the Russell 2000 gained 4% in the first quarter.

The economy continues to defy expectations. Recession worries have mostly disappeared with hopes that the Federal Reserve Bank will continue to target lowering interest rates in the second half of the new year.  Corporate profits have remained resilient, and the interest in artificial intelligence technology has pushed investors to continue buying stocks.  This keeps pushing the markets to new highs.

With such a robust start to the year, some investors wonder if returns will get harder to come by going forward. As long as consumers continue to spend energetically and corporate America keeps adding employees, my money is on the economy remaining brisk.

There is an additional factor that is stimulating the economy.  American workers are becoming more productive.  A recent analysis from Bank of America showed that the average revenue produced per worker for S&P 500 companies hit an all-time high in February after 15 years of no gains. Some Wall Street analysts estimate that this rise in labor productivity could help the stock market look past fears that inflation is still a lingering issue.  The thinking behind this expanding worker productivity is that if productivity goes higher, companies can cut operating costs which improves profit margins and lowers prices for the consumer.  It appears that the markets have begun to factor lower inflation and future growth in the economy.

Coming into the year investors were hoping that the Fed would cut rates six times in 2024.  There was not enough confirmed data that could justify 6 cuts in rates.  This in my opinion was wishful thinking.  The Fed has more realistically suggested perhaps 2-3 cuts in rates in 2024 should data continue to show a further slowdown in the economy.

Fed Chairman Powell has stated in numerous reports that controlling inflation is not an easy task and that reaching the goal of a 2% will continue to travel on a  “bumpy path”.  He further stated that “inflation reports have not been as low as the data readings received in the second half of last year, but along the lines of what we want to see.”  In my opinion, there is still a way to go even with the progress made so far.  Generally, the last part of any race is the hardest.  I believe that we are on the right course with inflation receding.  This is being factored into the thinking that continues to fuel the markets.

Let me end with data that is hard to ignore.  There is a key metric called the US Equity Score Percentile Rank, which keeps track of where the S&P 500 Index Funds rank relative to all the other asset classes.  That reading currently sits at 99.3%, meaning that the S&P 500 Index Funds is scoring higher than 99.30% of all 134 groups tracked for this comparison. The S&P 500 Index Funds Group has been at the very top of the ranking since 2012.  Unless we have all slept through the past 12 years, this clearly shows that the US economy is strong. The companies represented in the S&P 500 will continue to generate strong earnings which have made us the dominant economy in the world.  This additionally reinforces our investment philosophy which focuses on the momentum exhibited by the sectors of the economy.  Fewer than 10% of large cap investment managers beat their benchmarks indexes in any given year.  We have achieved success because we don’t compete with the indexes. Our strategy of utilizing the benchmark indexes themselves has provided consistent financial gains through good times and bad.

I wish you all a continued prosperity in 2024.  Pease feel free to reach out to us if you have any questions.  We are happy to discuss your interests or address any items that you feel important to your financial future.
Best regards,

Ruben E. Guerra

Guerra Investment Advisors