“Only through focus can you do world-class things, no matter how capable you are.”    William “Bill” Gates

A Good Year in Just One Quarter

The first quarter saw the equity rally continue robustly, with the S&P 500 up over 10% and the tech-heavy NASDAQ 100 rising over 8%. As the quarter progressed, the advance began to broaden, a welcome sight to market bulls. Other stock indices around the world reached new highs, although China’s Shanghai Composite lagged behind and has now decreased about 50% from its 2007 peak.

Total returns for fixed income were negative, with the US Treasury ten-year yield rising from 3.88% to 4.20%. The US dollar rose somewhat counterintuitively as did most commodities, especially oil and gold.

The Narrative Changes Although It Remains Positive for Equities

The “Everything Rally” that began in early November assumed that the Federal Reserve was finished raising the short-term Fed Funds rate and would soon pivot or begin lowering rates in March. In fact, the popular belief was that rates would be cut five more times in 2024.

The Fed’s own projections showed a total of only three rate decreases, a divergence we mentioned in our last quarterly report. As the new year progressed, economic reports showed good overall growth, marked by continuing job creation. However, price level increases remained elevated, not dropping enough to meet the Fed’s inflation goal of 2%. As March ended, fixed income markets brought down their expectations accordingly.

Corporate profit growth, which surged in 2021 due to massive fiscal spending and Covid reopening, tailed off and actually dipped slightly in 2023. Currently, however, earnings have likely bottomed and with the economy providing a tailwind, may grow between 8 to 10% in 2024. This helped the participation in the stock rally to expand as the quarter went on, encouraging strategists to believe the equity rally could last longer than previously thought.

Hard, Soft or No Landing?

The durable economic expansion has lowered the chances of recession (hard landing) considerably. A “Goldilocks” or soft landing, where the economy runs neither too hot nor too cold, gained more acceptance. Recently, a new scenario — that of no landing — has emerged. This is where the economy does not moderate, and inflation remains higher than the Fed would like.

Each economic report is being carefully examined to determine which of the three scenarios will occur and will likely be a major question for the rest of this year. Inflation reports (CPI, PPI and PCE) have been disappointing so far, with January, February and March statistics showing prices still heading higher in the 3 to 4% range.

Geopolitical and Other Developments

The conflicts in the Middle East and Ukraine show few signs of abating and is contributing to the rise of oil prices, most affecting large importers in the Eurozone and Japan.

For the US, the situation is a double-edged sword. Consumers may experience higher gasoline prices this summer, but oil producers may benefit. Many European importers of oil and natural gas are switching to North American exporters, using the safer and less expensive North Atlantic route. Until now, most of Europe had been receiving its energy supplies through more hazardous or expensive routes coming from the Red Sea or around the Cape of Good Hope in southern Africa.

A new supply chain issue arose in March, when a large container ship slammed into the Francis Scott Key near Baltimore, effectively closing the large port for at least several weeks. This may further slow the path to 2% inflation the Fed has been hoping for.

The Outlook for the Third Quarter and Beyond

  • We have selectively trimmed holdings in some stocks that have appreciated the most over the last year, (for example, Artificial Intelligence and obesity weight loss companies), while broadening exposure in Financials, Industrials and Energy sectors.
  • We are maintaining a flexible fixed income strategy, ready to pivot from short to longer term when the Fed is closer to finally lowering interest rates. This may take a while longer.
  • Our satellite (alternative) strategies are maintaining their longstanding weightings in the ETF (Exchange Traded Fund) backed by physical gold.
  • It now looks like the Fed will lower interest rates at most two times this year, with fewer cuts possible if inflation continues to be sticky. At the current run rate of the economy and elevated commodity prices, the overall rate of price increases may not slow down until the second half of the year.

Although equities have done well and may be due for a breather, a fairly strong economy highlighted by good jobs growth should support corporate earnings. We reiterate that investors should not make emotional decisions based on election year headlines, as very often those decisions lead to investment losses. We believe that equities will end up having a good year, and bonds should do better by year-end.



Economics is a branch of astrology that thinks it’s a branch of astronomy.” — Anonymous

Year End Summary

The fourth quarter of 2023 featured an exclamation point to the year, with an October swoon in both equity and fixed income markets leading to an “everything rally” in November and December.

For the year, the S&P 500 returned over 26%, although the breadth of the market was sorely lacking, with the mega cap stocks such as Apple, Microsoft and Amazon up strongly, while about 72% (about 360 stocks) of the index underperformed the total. Foreign equities also did well, led mainly by developed nations.

After a dismal 2022, bonds also went up, although the yield on the 10-year Treasury did a roundtrip, starting out the year at 3.88% then spiking to 5% in early autumn before falling back to 3.87% to close out 2023. Commodities were mixed, with WTI (West Texas Intermediate) oil falling almost 12%. Gold rose about 13% despite rising short term Fed Funds rates. This was largely due to steady buying by central banks, especially China.

The Dog That Didn’t Bark

A major positive surprise this past year was the persistent strength in the U.S. economy, with households spending and companies hiring more people.

Since the onset of Covid, economic forecasting (which many say is only a pseudo-science) has become even more difficult. For example, excess consumer savings from pandemic stimulus checks were estimated at about $800 billion at the beginning of 2023. In October, however, the government announced that consumers actually had $1 trillion more in savings than before the pandemic. This cushion kept personal spending from weakening significantly, even though sentiment surveys reported grouchy households complaining that prices were not falling back to 2019 levels. Further, many small businesses — a prime source of new job hiring — are cautious about the economy yet are very reluctant to lay off workers due to the recent shortage of workers in 2021. Job growth, therefore, has also proven to be a pleasant surprise.

Geopolitical Problems Fester Under the Surface

The October Hamas attacks in Gaza have added a new layer of uncertainty to global unrest. The war in Ukraine is still showing no signs of resolution. Shipping has been disrupted in the Red Sea, with many freight companies forced to go around the Cape of Good Hope in South Africa to deliver goods including oil, a time consuming and costly process. Ironically, North American based oil and gas explorers are benefitting, with many European countries importing energy from safer and shorter North Atlantic routes.

Although the current global situation is worse than it was pre-pandemic, the crisis should be manageable absent a direct war erupting between Iran and Israel. Since the end of World War II, Middle East conflicts have flared up every several years, with each outbreak eventually petering out. The situation does require close monitoring, however, especially if shipping is cut off at the critical Straits of Hormuz.

Interest Rate Expectations and the Election

Both the stock and bond market rallies late last year were due to a recalibration of Fed Funds rate expectations. Currently, futures markets expect the Fed to begin cutting interest rates in March, with a total of six cuts totaling 150 basis points (or 1.50%) for the entire year. However, Federal Reserve projections show only three cuts for a total of 75 bps (basis points) for 2024.

With such a divergence in the forecasts, clearly one side will be wrong in its assessment. If it is the markets, it’s likely that stock and bond prices may give back some of the fall 2023 rally. Therefore, economic reports between now and the March FOMC (Federal Open Market Committee) meeting will be crucial in divining which prediction is correct. A “good news is bad news” scenario, in which good economic news is bad news for financial markets (by implying that the Fed will not cut early and often), could occur and cause some choppiness in the financial markets in the first half of the year.

2024 is also a presidential election year, and markets will be subject to headline risk for most of the year. We caution not to draw any conclusions from current opinion polls, which like economic forecasts, tend to be less accurate as time goes on. Things may become clearer towards late October, with markets discounting the industries and stocks that will be the winners or losers by mid-November.

Current Portfolio Positioning

With all of today’s uncertainty, we believe that a diversified portfolio based on strong fundamentals and balance sheets remains the best way to navigate through this period. The fixed income approach should also be flexible, with the option of adding to bond maturities if longer-term yields begin creeping higher again. A longer-term horizon paid off handsomely for investors last year and we feel it will continue to do so again in 2024, even though returns may not be quite as robust as they were in 2023.