Stocks Surge to New Highs to Start 2024

Quarterly Insights – April 2024 
The 2023 rally continued in the first quarter of 2024 as a positive combination of  stable economic growth, falling inflation, impending Fed rate cuts and ever-growing  enthusiasm towards artificial intelligence (AI) propelled stocks higher, as the S&P 500  rose above 5,000 for the first time and hit new all-time highs.  

The year began with a modest uptick in volatility, as traders and investors initially booked profits following the strong 2023 gains. However, those initially small declines  intensified shortly after the start of the year when the December Consumer Price  Index, an important inflation indicator, declined less than expected. That reading challenged the idea that inflation was quickly falling towards the Fed’s 2.0% target and caused investors to delay the expected date of the first Fed rate cut, as  expectations for that first cut moved from March to June. Fears of potentially higher than-expected rates pushed stocks temporarily into negative territory early in  January. However, the declines didn’t last. First, fourth-quarter corporate earnings  were again better than feared and that helped stocks recover from those early  declines. Then, in late January, the Federal Reserve clearly signaled that rate hikes were over and strongly hinted that rate cuts would occur in the coming months.  Investors seized on that positive message and the S&P 500 hit a new all-time high  late in the month and finished with a modest gain, up 1.59%.  

The rally continued and accelerated in February as fears of a potential rebound in  inflation subsided. Inflation metrics released in February largely met expectations 

and importantly did not imply that inflation was reaccelerating. As such, investor  expectations for a June rate cut were strengthened and that helped stocks extend  the year-to-date gains. Then, on February 21^st, Nvidia, the semiconductor company  at the heart of the AI boom, posted much-stronger-than-expected earnings and  guidance. Those results further fueled investors’ AI enthusiasm and large-cap tech  stocks powered the S&P 500 higher into month-end as the index hit a new record  high above 5,000. The benchmark domestic index gained 5.34% in February.  

The final month of the quarter saw even more gains, aided by familiar factors such  as solid economic growth, generally as-expected inflation data, AI enthusiasm and  bullish Fed guidance. Broadly speaking, economic and inflation data largely met  expectations in March and continued to point towards stable growth and (slowly)  falling inflation. Then, in mid-March, updated Federal Reserve interest rate projections still pointed towards three rate cuts in 2024, further reinforcing investor  expectations for a June rate cut. Those positive factors combined with additional strong AI-related earnings reports (this time from Micron) to push markets broadly  higher as the S&P 500 crossed 5,200 for the first time late in the month and ended  March with strong gains.  

In sum, the 2023 rally continued and accelerated in the first quarter of 2024 thanks to  positive news flow that implied stable growth (no recession), still falling inflation,  looming Fed rate cuts and continued AI enthusiasm and those factors propelled the  S&P 500 to new all-time highs. 

First Quarter Performance Review 

The first quarter of 2024 reflected a much more evenly distributed rally compared to  the fourth quarter of 2023, where tech and tech-aligned sectors handily  outperformed the rest of the markets. Over the past three months markets saw broad gains distributed more equitably amongst various sectors and industries.  

However, while the rally in stocks did broaden out in the first quarter, that did not  benefit small caps as they were some of the notable laggards over the past three  months. Small caps registered a positive return for the first quarter but lagged large  caps as concerns about stubbornly high interest rates weighed on small caps, as  they are more sensitive to higher funding costs and slowing growth.  

From an investment style standpoint, growth once again outperformed value in the  first quarter but the margin was much closer than last year, as both investment  styles logged strong quarterly returns. Continued heightened AI enthusiasm was the  main reason for the modest growth outperformance over the past three months, as  large-cap tech stocks again saw strong rallies in Q1. 

On a sector level, as mentioned, gains were broad as 10 of the 11 S&P 500 sectors  finished the first quarter with a positive return. Unlike 2023, however, tech and tech aligned sectors didn’t substantially outperform. To that point, the best-performing  sectors in the market in the first quarter were communication services, financials,  energy and industrials. That sector mix reflected the influences of AI enthusiasm,  strong financial stock guidance, solid U.S. economic data and rising optimism  towards a rebound in Chinese economic growth. The diversified gains demonstrated that the Q1 rally was driven by a more varied set of influences beyond just AI  enthusiasm. 

Turning to the laggards, the only S&P 500 sector to log a negative return for the first  quarter was the real estate sector, as it continues to be weighed down by concerns about the health of the commercial real estate market. Specifically, terrible quarterly  earnings from New York Community Bank reminded investors of the sustained  weakness in the commercial real estate market and that weighed on the real estate  space. Consumer discretionary also lagged and registered only a slightly positive  return as numerous retailers warned about a potential slowing of consumer  spending during the first quarter (this is something to monitor as we begin the  second quarter).  

US Equity Indexes	Q1 Return	YTD
S&P 500	10.56%	10.56%
DJ Industrial Average	6.14%	6.14%
NASDAQ 100	8.72%	8.72%
S&P MidCap 400	9.95%	9.95%
Russell 2000	5.18%	5.18%

Source: YCharts 

Internationally, foreign markets posted solid quarterly gains but still underperformed the S&P 500. Looking deeper, foreign developed markets outperformed emerging  markets in Q1 thanks to better-than-expected economic data and as expectations  rose for early summer rate cuts from the European Central Bank and Bank of  England. Emerging markets, meanwhile, logged only slightly positive returns in Q1 and  solidly underperformed the S&P 500 thanks to mixed Chinese economic data and a  lack of substantial Chinese economic stimulus early in the quarter. 

International Equity Indexes	Q1 Return	YTD
MSCI EAFE TR USD (Foreign  Developed)	5.81%	5.81%
MSCI EM TR USD (Emerging Markets)	2.16%	2.16%
MSCI ACWI Ex USA TR USD (Foreign  Dev & EM)	4.66%	4.66%

Source: YCharts 

Commodities saw strong gains in the first quarter thanks to still-elevated  geopolitical tensions, a weaker U.S. dollar and smaller-than-expected declines in  inflation. Oil rallied sharply in Q1 thanks to late-quarter optimism for an acceleration  in Chinese economic growth, combined with an increase in geopolitical tensions  following the continued attacks on commercial ships in the Red Sea, along with an  increase in Russian attacks on Ukrainian energy infrastructure. Gold hit a new all time high in the first quarter, meanwhile, and logged solidly positive returns thanks to  the aforementioned buoyant inflation data and a weaker U.S. dollar.

Commodity Indexes	Q1 Return	YTD
S&P GSCI (Broad-Based  Commodities)	10.36%	10.36%
S&P GSCI Crude Oil	15.93%	15.93%
GLD Gold Price	7.93%	7.93%

Source: YCharts/Koyfin.com 

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg  Barclays US Aggregate Bond Index) realized a slightly negative return for the first  quarter of 2024. Disappointing inflation readings were the primary reason for the  

weakness in bonds as they delayed the expected start of Fed rate cuts from March  until June and caused bond investors to consider that rates may be higher than  previously expected over the medium and longer term.  

Looking deeper into the fixed income markets, longer-duration bonds handily  underperformed those with shorter durations. That performance gap was due to the  slower-than-expected decline in inflation, because while it won’t materially delay the  start of Fed rate cuts, it does threaten to keep rates “higher for longer,” which is a  bigger negative for longer-dated debt.  

Turning to the corporate bond market, higher-yielding but lower-quality “junk” bonds  outperformed investment grade debt as looming Fed rate cuts and buoyant  inflation, amidst stable economic growth, led bond investors to “reach” for more yield  in the riskier parts of the credit spectrum. 

US Bond Indexes	Q1 Return	YTD
BBgBarc US Agg Bond	-0.78%	-0.78%
BBgBarc US T-Bill 1-3 Mon	1.32%	1.32%
ICE US T-Bond 7-10 Year	-1.35%	-1.35%
BBgBarc US MBS (Mortgage backed)	-1.04%	-1.04%
BBgBarc Municipal	-0.39%	-0.39%
BBgBarc US Corporate Invest Grade	-0.40%	-0.40%
BBgBarc US Corporate High Yield	1.47%	1.47%

Source: YCharts 

Second Quarter Market Outlook 

We begin the second quarter in the midst of a positive macroeconomic environment  as growth appears stable, inflation is still falling, the Fed is likely going to deliver the  first rate cut in four years and AI enthusiasm keeps earnings estimates high. But  while this is undoubtedly a favorable set up, the strong rally of the last six months has  left the S&P 500 at previously historically unsustainable valuations while investor and  analyst sentiment is very bullish and, potentially, complacent. So, while the outlook is  currently positive, it’s essential we continue to monitor the macroeconomic horizon  for risks because at current stretched valuations and with sentiment very bullish, the  market is vulnerable to a negative surprise.  

Specifically, while it’s true that economic growth has remained resilient in the face of  higher rates, some data is pointing to a loss of momentum. Retail sales missed  expectations in January and February while the unemployment rate jumped to the  highest level since 2022 during the first quarter. Neither number warrants concern 

about the economy right now, but both serve as a reminder to watch data closely as  a continued economic expansion is not guaranteed. 

The scourge of Inflation, meanwhile, is still retreating but the pace of that decline has  slowed meaningfully. Core CPI, one of the Fed’s preferred measures of inflation, has  barely declined over the past several months as it sat at 4.0% y/y in October and in  February was just 3.8% y/y. Meanwhile, other anecdotal indicators of inflation have  hinted at a rebound in prices. If inflation bounces back that will reduce the number of  Fed rate cuts in 2024 and that disappointment could pressure stocks and bonds.  

To that point, markets fully expect a June rate cut from the Fed and three rate cuts in  2024 and that assumption was central to the first-quarter rally. However, those rates  cuts are not guaranteed and if the Fed does not cut as aggressively as markets  expect, that will result in disappointment and a potential decline in stocks and bonds.  

Finally, investor enthusiasm towards the potential for artificial intelligence remains a  critical part of the bull market and strong earnings from Nvidia in February furthered  investors’ hopes that AI integration will lead to a profitability and earnings boom, not  just for tech companies, but for the entire market. However, that’s also not  

guaranteed and so far, AI integration has produced a lot of flashy headlines but not  a lot of profit maximization for non-tech industries. If AI fails to broadly boost profits  and demand declines, that will be a significant negative for this market.  

Bottom line, this historic rally is currently supported by positive fundamentals. But we  cannot let the currently positive set up blind us to risks and that’s why, while we are  pleased with the market performance, we are also focused on managing both  reward and risk in portfolios, because despite the strong performance this market  remains vulnerable to negative news. 

At Trubee Wealth Advisors we are committed to helping you effectively navigate this  challenging investment environment. Successful investing is a marathon, not a  sprint, and even through both bull and bear markets, we will remain focused on the  diversified approach set up to meet your long-term investment goals. 

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as  we’ve worked with you to establish a unique, personal allocation target based on  your financial position, risk tolerance, and investment timeline. 

We remain vigilant towards risks to portfolios and the economy, and we thank you for  your ongoing confidence and trust. Please rest assured that our entire team will  remain dedicated to helping you successfully navigate this market environment. 

Please do not hesitate to contact us with any questions, comments, or to schedule a  portfolio review.