“You do not want to have a political view in investing. Most people put it through a political prism. They just can’t keep their politics out of it. They can keep their religion out of it. But politics, they just have to look through those glasses. If you’d done that, if you’d been a staunch Republican or a staunch Democrat through these 77 years, you’d have missed out on a lot of the party.”
– Warren Buffett
Review
The stock market came out of the gates strong to begin 2024 with the S&P 500 Index posting a 10.2% return for the first quarter, its best start to a year since 2019. Similarly, the NASDAQ delivered a 9.1% return for the quarter, with the Dow Jones Industrial Average (DJIA) not too far behind with a 5.6% quarterly advance. Dating back to the fourth quarter of 2022, the S&P 500 Index and DJIA have both been positive for five of the last six quarters. According to CFRA Research, the S&P 500 set twenty-two new all-time highs during the first quarter, which is the sixth greatest first-quarter count since WWII. Also setting multiple new highs for the quarter were the NASDAQ-100 (16) and the DJIA (17).
The first quarter rally has expanded beyond the magnificent seven stocks (NVIDIA, Meta, Amazon, Microsoft, Alphabet, Apple, and Tesla) that provided such a substantial percentage of the market return in 2023. This quarter, ten out of the eleven S&P 500 industry sectors rose in value, with Communication Services, Energy, Technology, Financials, and Industrial sectors all outperforming the broad index. The only sector that was in negative territory during the quarter was Real Estate with a slight loss. In addition, more than half of the stocks in the S&P 500 have obtained 52-week highs according to The Wall Street Journal.
The broad economy continued to grow at a stronger pace than many investors expected. Recession worries have taken a back seat as investors have been enthusiastic about artificial intelligence developments and hopes for the Federal Reserve to start lowering interest rates in the second half of the year. Consumers continue to spend, employers continue to hire new people, and the unemployment rate has stayed below 4%. The Federal Reserve has reiterated that inflation remains on a downward trend even though there have been some stronger than expected inflation reports over the past several months.
A surprising development in the first quarter, considering the strength of the stock market, was the increase in Treasury bond yields. The 10-year U.S. Treasury yield, which is the benchmark for home mortgages, car loans, and many corporate loans, rose from 3.86% at the end of 2023 to 4.20% to close out the quarter. This increase shows the market likely expects the economy to remain strong despite the ongoing recession concerns. When the year began, institutional investors were forecasting the Federal Reserve would cut interest rates six times in 2024. However, now the futures market has reduced that projection to three interest rate cuts for the rest of the year. According to CME FedWatch, the June Fed meeting seems to be the most likely first cut in the federal funds rate from its current range of 5.25%-5.50%. Interestingly, there are some forecasters now only projecting one or two interest rate cuts for the rest of the year due to inflation topping recent expectations.
Outlook
The stock market heavily weighs the results and guidance issued during the quarterly earnings announcements from corporations. Corporate earnings releases for the 4th quarter of 2023, which wrapped up in late February, were generally stronger than expected. According to Bespoke Investments, “For the quarter, 72% of stocks beat earnings per share estimates while 64% beat sales estimates, but only 6% of stocks raised forward guidance compared to 11% that lowered guidance.” The consensus estimate for the full year 2024 earnings growth is 11%, much stronger than the 2% growth rate in 2023. Beyond this year, the consensus forecast for 2025 earnings growth is 13%, although this will likely be subject to many revisions as this year progresses.
History suggests stocks are well positioned to keep the good times going. According to Dow Jones Market Data analysis of index performance since 1950, when the S&P 500 adds 8% or more in the first quarter, it finishes higher the rest of the year 94% of the time, with an average gain of 9.7% over the next three quarters. Also, according to Dow Jones Market Data, presidential-election years tend to end the year with stock market gains. Since 1950, the S&P 500 has risen in a presidential-election year 83% of the time and has averaged a 7.3% gain in those years.
Despite the positive corporate results and strong historical precedent for positive returns this year, investors should keep in mind it is common for stocks to have a 10% correction annually on average. Nobody ever knows when the mood of the market can change due to new information or an unexpected event. Bespoke Investment Group encourages investors to embrace market declines – “Emotions and investing don’t mix. Emotional investors tend to sell when the market is going down and buy when the market is going up. They should be doing the opposite. For example, if you only owned the US stock market on the day after up days since SPY (S&P 500) began trading in 1993, your cumulative gain would be just 29.7%. If you only owned the market on the day after down days, you would be up 797%. If you were a buy and hold investor you would be up 1,063%.”
The gains for the stock market going forward likely depend more heavily on a strong economy that can generate robust earnings growth rather than on the Federal Reserve lowering interest rates. The economy continues to grow better than many analysts predicted, with the U.S. real gross domestic product (GDP) growth rate coming in at 2.5% for 2023. GDP is expected to grow another 2.1% this year, and then decrease slightly to 1.7% in 2025, based on the consensus estimates of economists followed by Bloomberg. The Atlanta Fed GDPNow estimate for the first quarter growth rate currently stands at 2.5%.
The 2024 presidential election is approximately seven months away, and investors are beginning to think about the potential impacts of the election results. It is natural for investors to place significant importance on the election when forming investment expectations. But we caution against placing too much emphasis on the political landscape when making investing decisions. Here are three quotes from well-regarded investment groups on the impact of politics:
“I worry that people worry too much about politics. Research shows that how people feel about the economy depends on their political leanings. There are a lot of Republicans who missed out on good stock market returns under Presidents Obama and Biden, and a lot of Democrats who missed out on great stock market returns under Donald Trump. I worry that people let how they feel about politics affect how they think about investing.” – David Kelly, Chief Global Strategist at J.P. Morgan Asset Management
“The performance of sectors during the Presidencies of Obama and Trump shows that the impact of the person in the Oval Office may not be as significant as often assumed. While the two were polar opposites in terms of policy and style, the stock market sectors that led and lagged during each President’s tenure were largely the same. In President Obama’s eight years, the three top performing sectors were Consumer Discretionary, Technology, and Health Care. For Trump, the three top performing sectors were the same. Likewise, Energy was the worst performing sector for both Presidents, and Financials was in the bottom three.” – Bespoke Investment Group
“For starters, there are numerous factors and trends that matter more to the direction of the stock market than whether Donald Trump or Joe Biden secures a second term as president and which party controls Congress. On the list are the outlooks for U.S. and global economic growth and inflation, the timing and magnitude of Federal Reserve interest-rate cuts, the implications of the artificial intelligence boom on corporate earnings, and wars and other conflicts abroad – to name a few.” – Barron’s Magazine
We believe the moral of the story here is to not let politics affect your long-term financial plan and investment strategy. The political landscape will continue to change and evolve, but with the ingenuity of corporations and the overall US economy, we believe the potential for long-term growth in the stock market will endure.
Please let us know if you have any questions or if you would like to discuss your financial situation in detail. Thank you for being clients of our firm.
Sincerely,
Marietta Wealth Management, LLC
The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary, and results discussed are no guarantees of applicability or future performance.
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