We are likely entering a period of stable economic growth with moderating inflation.
With fears of a recession receding, the economy has continued to grow. The latest data indicates that the U.S. economy grew by 3.1%* over the past year, adjusted for inflation (“real GDP”). We are now back on the economy’s long-term growth trend of 2%*. Consumer confidence has improved, employment continues to be strong with unemployment running close to 4%, and business investment spending increased as a percentage of GDP in the fourth quarter.
Inflation has come down, with the gauge watched by the Fed running at 2.8%* in February. Shelter, a lagging statistic, and auto insurance have been thorny issues.
Investor enthusiasm for AI continues to push up the value of a limited number of very large tech companies.
The broad U.S. equity market was up 10% (Russell 3000 Index) in the quarter, reaching new highs. This was the strongest first quarter since 2019**. While this level of return continues to reflect strong price appreciation of a limited number of very large technology companies, there does appear to be a broadening out of performance to include other companies. All industry sectors but one, real estate, were up in the quarter. Growth bested value, and smaller companies lagged their larger counterparts.
Stock markets outside of the U.S. continue to offer attractive potential returns.
International markets were also positive, with developed markets up 5.8% (MSCI EAFE Index) and emerging markets up 2.4% (MSCI EM Index). Compared to U.S. stocks, international stocks have lower valuation levels, offering the potential for attractive returns. Given the level of concentration in U.S. market indexes, diversifying investment portfolios to include some representation from international equities is important for risk management and remains a tenet of HTG’s investment philosophy.
The U.S. Federal Reserve has signaled three interest rate reductions this year, which should lower short-term rates.
The Federal Reserve has indicated that rates may stay high for longer but is still projecting three interest rate reductions this year. Rates ticked up slightly in the quarter as market expectations were brought in line with Fed comments. The broad bond market index was slightly negative for the quarter at -0.8% (Bloomberg US Aggregate Bond Index). With the economy growing slowly, the likelihood of the Fed having engineered a “soft landing” has increased.
It remains important not to let fear or complacency drive investment decisions.
With the U.S. equity market’s return of 10% for the first quarter, it is easy to believe there is little risk and great returns in stocks. That would be a mistake. With a single theme (AI) driving up the prices of a small number of stocks, it is equally easy to fear an impending market correction. That, too, may be a mistake. Neither fear nor complacency drives our investment strategy, nor should it drive yours. Stock markets are always volatile but tend to appreciate over the long term.
* JPMorgan Guide to the Markets, March 31, 2024
** Wall Street Journal, “The Market’s Magnificent Seven is Now the Fab Four,” April 1, 2024.