Q1 2024 Market & Economic Update

Hope that your year has started off as well as the broad stock market. Bulls were on parade during the first quarter of 2024, as the major U.S. stock indexes continued to extend gains from the final quarter of last year.

With the books closed for the first quarter, I wanted to take this opportunity to offer an update on key developments. 

S&P 500: Best Q1 Since 2019

The S&P 500 found its way to its best first quarter since 2019, extending recent gains to a five-month win streak.

The large-cap index and best gauge of the U.S. economy found strength early in the quarter via the AI theme, with NVIDIA contributing to the second consecutive positive quarter for the S&P 500. Some broadening into other sectors was a topic late in the quarter, with the energy and communication sectors finding buyers.

Overall, for the first quarter of 2024, the S&P 500 increased by 10.16%, the Nasdaq 100 rose by 8.49%, and the Dow Jones Industrial Average saw a rise of 5.62%.

Soft, Hard, or No Landing?

Soft, hard, or no landing – the question remains whether the Federal Reserve will be able to pull off its inflation-fighting campaign without a recessionary impact. 

U.S. stock market bulls cheered the first quarter as investors gained more confidence in a “soft landing” (tamed inflation but no recession) amid inflation moderation. The prospect of perhaps “no landing” (no recession but persistent inflation) was also considered.

Inflation Mixed for Q1

Costs of goods and services are still rising annually, albeit at a slower pace than the peak of the recent inflation cycle.

Metrics were mixed in the first quarter, with consumer inflation picking up in January (December data), easing in February, and then rising in March.

The last Consumer Price Index (CPI) release of the first quarter showed a 3.2% rise year-over-year versus 3.1 % expected. Inflation is still running hotter than the Fed’s 2% target rate, but the market wants rate cuts.

Labor Market

Labor market resilience, based on government nonfarm payroll data, persisted throughout Q1. First-quarter data showed solid payroll gains (216,000 in December, 353,000 in January, and 275,000 in February) with all three months beating analyst consensus expectations.

The data releases have been strong, indicating economic strength but the initial figures are not quite conducive to the market’s desire for rate cuts. Downward revisions have come to the rescue somewhat.  

“Downward revisions” essentially means changes to the initial data releases in subsequent months. Data shows that the initial numbers have been revised lower for 10 of the last 12 months.

Such revisions can help to bolster the case for Fed rate cuts, indicating a less strong labor market. 

Unemployment Rate

The unemployment rate also showed a mixed picture for the first quarter. However, there was a notable tick higher in unemployment in the last monthly data release of the quarter, which showed unemployment sitting at a one-year high of 3.90%.

Federal Reserve (Fed) Summary & Outlook

The first quarter featured two Fed meetings, with the Fed leaving rates unchanged in January and March. The result is the same current target overnight lending rate of 5.25 - 5.50%, a 23-year high.

While the Fed left rates unchanged at the most recent March meeting, the Fed did let us know that three 25-basis-point cuts are expected by the Federal Open Market Committee in 2024 via its Summary of Economic Projections (SEP).

Markets loved Federal Reserve Chair Jerome Powell's commentary at the post-meeting press conference, as all three major stock indices jumped to record high levels. However, on the last day of the quarter, Powell reiterated that the Fed needs to see more good inflation readings before it is ready to cut rates.

At the end of the first quarter, markets were pricing a 95.8% probability of the Fed leaving rates unchanged at the May 1st Fed meeting and a 63.6% chance of a rate cut at the following meeting on June 12th. 

One thing we know for sure is that those percentages will change each day.

What If the Fed Doesn’t Cut Rates?

Anything is possible. Market watchers were looking for six cuts at the end of last year; now, it has been whittled down to three (or maybe less) for 2024. Yet, major U.S. stock indexes have risen while the number of cuts expected declined.

Cutting rates with the economy running hot would defy conventional wisdom, and the “this time is different” narrative can be cause for concern for many veteran investors. 

It’s an election year, and the dynamics are multifaceted. We will see what future inflation and job data look like.

Where Is the Pullback?

It’s been quite a while since a meaningful pullback in the S&P 500.

Market sentiment was very high in Q1, and what could potentially or ultimately be deemed a rate-cutting delusion is still alive and well, helping to fuel the gains of major U.S. stock indexes.

Nobody can definitively know what will happen with the Fed cutting rates or what the interest rate markets will do on their own.

Market pullbacks are healthy in bull markets, and there hasn’t been one in a prolonged period. Such corrections are more common than most people think.

Long-Run Planning

If you asked someone well versed in finance three years ago, “What would the stock market do if interest rates went from sub-1% to over 5% in three years”?

Certainly, the overwhelming answer would have been for stock market declines during the rise in rates, which we certainly saw initially in 2022, but the recovery since then has surprised many. These markets tend to defy conventional wisdom time after time; this is why long-term investing is a lifelong commitment with the fruits of time bearing themselves as a result of investor discipline.

With the above quarterly recap noted, I would love to hear how things are going for you. If first-quarter market developments are on your mind, or if there is anything else I can help with, please feel free to reply to this email or call me.

I am always here as a resource for you!

Jeff Boyd, CFP®
CERTIFIED FINANCIAL PLANNER™

Registered Representative offering securities and advisory services offered through Independent Financial Group, LLC (IFG), a Registered Investment Adviser. Member FINRA/SIPC. Phase Four Financial Solutions, Orion, and IFG are unaffiliated entities.

No investment strategy can guarantee a profit or protect against loss. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Diversification does not guarantee profit nor is it guaranteed to protect assets. 

The information and opinions presented are for general information only and are not intended to provide specific advice or recommendations for any individual. Independent Financial Group (IFG) does not give tax or legal advice. IFG Registered Representatives (RR) do not give tax or legal advice while acting as an RR. You should contact your attorney, accountant or tax advisor with regard to your individual situation. The opinions of the presenter do not necessarily reflect those of Independent Financial Group, LLC, its affiliates, officers or directors.