Transcript:
Entering ‘24 I think investors were looking at three major things. First being, how many times is the Fed going to be able to cut interest rates? Second being is the economy going to continue to stay strong? Will there be a soft landing? Maybe will there be no landing the economy will continue to quick be quite strong. And then thirdly, we did see the equity market start to broaden out a little bit more at the end of the year, past those seven stocks that were dominating 2023. And the question would be, would it be a healthier market would more stocks started to participate and continue to participate in the rally, besides that small set of stocks that dominated the year last year.
The S&P 500 as it sits here today is now up nearly 7%. Unfortunately, the market has kind of narrowed back at this point in time, it's now less than those seven stocks. So at this point, last year, you had the mag seven, you know, only four of those stocks actually outperformed the S&P here today driven largely by Envidia and Meta. So we've seen a little bit of reversal as well, from small caps. So small caps ended the year on a good run last year, they're sitting about five plus percent behind large caps again here. So a little bit of what's old is new again, in terms of what we saw, we saw a better market at the end of 23, it's kind of reverted to a little bit even more concentrated form of what we had.
The strong year-to-date returns, I think can be kind of put down into two things, really strong earnings reports out of Invidia and Meta that's unquestionable, those, both those stocks really sparked a lot of interest, and their blockbuster earnings reports that that got a lot of extra excitement in the market. But again, just kind of this belief that the economy is going to continue to chug along, we've seen some signs of strength, some signs of weakness that are mixed with the belief that, you know, again, the Fed is going to be able to cut interest rates still three times is an election year. So there's some belief that fiscal support probably is still going to be more likely than not haven't seen a whole lot of signs occurring. But there is a little bit of euphoria driven on nature to it. But there have been some strong earnings in some of those biggest stocks as well, which helped to propel the gains so far here and in 2024.
Where will interest rates go from here?
At the end of last year, we saw interest rates fall pretty hard into the end of the year. 10-year Treasury dropped from about 5%, down sub 4%. Behind a lot of that was some positioning elements. So there was a pretty big contention of short sellers in the treasury market, as rates fell, they had to cover. So rates may have fallen a little bit too far at the end of 2023. So we've seen a little bit of unwind. That's occurred too, so that why we've seen interest rates back up so far here talking about the 10-year Treasury this year, but also when we ended the year and the expectation for this year was that the Federal Reserve would be cutting interest rates, at least six times early in the year we got to pricing to you know seven to eight potential cuts, the Fed was saying three, as the year has moved on, and you're seeing the market has moved back towards that fed forecast of three cuts versus potentially six. And that's putting a little bit of pressure back up on interest rates. And then in the last month have also seen some little bit hotter prints on the inflationary data, which has also pushed pressuring those long end rates a little bit more.
One of the striking elements when we're looking at the backup and interest rates and kind of the change in the rate projection for the Federal Reserve that the market has, is that it has certainly impacted the 10-year Treasury rate going back up to about 4.3%, as we sit here today. But a lot of that rally last year was built in on the equity and fixed income market was driven off that belief that the Fed was going to be able to cut interest rates quite aggressively this year. That's not coming to the fore, that's backed up interest rates on the fixed income side. But it really hasn't impacted equities to the standpoint. So I think when you look at interest rates moving back up, they haven't gotten to a dangerous level yet for the equity market. If we push the 10-year treasury, you know, north of 4.5 back towards 5%. Last late summer into the fall that was a challenging element for the equity markets. That could be one of the reasons why you're seeing small caps have a little bit challenging year two they're more focused on the rate dynamic. So certainly still some elements of risk out there that the equity market hasn't digested to the same nature that the fixed income market has with the backup and interest rates.
What economic indicators are you watching?
Clearly, inflation is gonna be the biggest dynamic that's turned back up a little bit. Everyone, at least market pundits, kind of when I say everyone, has as been expecting that inflation is going to cool down it's gonna meander back down towards 2%. I think more recently, we've seen that that might be a little bit harder than that. If that's the case, the Fed is going to have to say higher for longer, so inflation clearly is going to become a bigger, bigger story if it continues to move higher. And then consumer-driven dynamics. Obviously, the consumer is the biggest portion of GDP growth, and when what's going to go on with the economy. And you know, the jobs market continues to look strong with our mixed signals consumption. You know, we all saw more negative retail sales here more recently, we're seeing some credit card delinquencies become a little bit bigger issue. So certainly, there are some signs of consumer stress if that were to build so really inflation, and anything related to the consumer and how that's going to progress are your biggest indicators, any type of indication of fiscal spending, additional fiscal spending would be the next biggest indicator that you'd be looking at? To see how the economy is going to continue to progress through 2024.
Where are you finding opportunities right now?
At the end of last year, we got a big boost in both stocks and bonds. From a valuation perspective, we still are cautious about equities. The economic story, if it holds up can still be supportive, you'd have to have further peak and expansion. But really, we continue to see the best opportunities and safer investments, believe it or not, when you look at the pricing of high-quality corporate bonds, high-quality US stocks, outside of the mag seven, those continue to be the areas and that is a really good thing to have for investors that some of the safer instruments are some of the most attractively priced. So thinking about things like intermediate term, you know, corporate investment grade corporate bonds, still yielding over five, to five and a half percent. And relative to where equities are priced, you know, that doesn't look too bad. So certainly there's there's areas that you don't have to take a lot of risk right now to still get a pretty good return moving forward.