Q1 2024 Commentary

Market Commentary

March brought about a broadening of stock market participation across market sectors, market capitalization, and investment styles. Rather than technology, stocks within the Financial, Energy, Materials, and Industrial sectors propelled the S&P 500 higher for the month of March. While the S&P 500 rose 3.2% and up for the 5th consecutive month, mid-cap stocks were up 5.6% and the Equal-Weighted version of the S&P 500 rose 4.5%. In addition, value stocks outperformed growth stocks in March, reflecting the broadening of performance beyond just the Mega-Cap Growth stocks.

The Aggregate Bond Index and Treasuries turned positive for the first month this year as 10-year rates declined modestly during March. While high quality bonds posted the first positive monthly return of the year, bond returns have been more favorable for lower quality and higher credit spread securities, such as high yield bonds, which have significantly outperformed the higher quality bond indices. As rates have risen since the start of the year, the higher yield of such bonds has offset the interest rate volatility.

Stock market volatility has subsided over the last 12 months, an environment that is very conducive to positive stock market performance, considering higher volatility is usually associated with negative market environments. One way to measure volatility is the number of single-day stock market returns that are either greater or less than 2%. Over the past 23 years, when the number of +/- 2% trading days is less than 10, the average return is 17.8% for the S&P 500 Index.

The Fed Watch, Economic Growth, and Looser Financial Conditions

It seems that market expectations for Fed rate cuts have returned to normalcy and in line with the March FOMC statement and Chairman Powell’s comments. Most are now expecting the Fed to initiate gradual cuts in the 2nd half of 2024 in response to cooler inflation and easing labor market conditions. That being said, the Fed is acknowledging stronger growth and above 2% target inflation, as FOMC members have increased their GDP forecasts significantly, with market estimates now calling for 2.1% growth vs 1.4% in December. Fed Chairman Powell will continue to watch the data for labor, inflation, and growth, but he is maintaining his conviction that rate cuts will be appropriate in the back half of 2024.

Supporting the expectations for increasing economic growth estimates was the recently released ISM Manufacturing data. The U.S. ISM Manufacturing PMI in the U.S. increased to 50.3 in March 2024, up from 47.8 in February and beating market expectations of 48.4. This marked the first expansion in the manufacturing sector after 16 months of contraction. There were positive trends in demand, with indicators such as the new orders Index (51.4 vs 49.2 in the previous month) and new export orders Index (51.6, the same as in February) showing expansion. In addition, the “Prices Paid” survey component accelerated to 55.8, above expectations of 52.7, its highest level, since July 2022. This is something to keep an eye on with respect to inflation.

Most indicators of financial conditions have eased or loosened over the last 12 months. This has been supportive of both economic growth and stock prices but makes further reduction in the rate of inflation more difficult. Financial conditions are the channel through which Fed policy gets transmitted to markets and the real economy. Fed rate cuts and a more accommodative monetary policy would loosen conditions and further stimulate economic growth. Conversely, a more restrictive policy would tighten conditions and weigh on economic growth.

Financial conditions, however, can change ahead of the actual policy, reflecting forward guidance and market expectations. This is the case today. Although the Fed has kept rates steady over last several months, financial conditions have been easing over the past year. The Chicago Fed National Financial Conditions (NFCI) is now at its lowest level since February 2022, before the Fed started raising rates. Other indicators also showing financial conditions have become more favorable include a general improvement in credit and lending conditions, lower volatility, and tightening credit spreads. Corporate credit spreads, both investment grade and high yield, are well below historical averages indicating both low financial stress and loose financial conditions.

Inflation Trend – Mixed Signals

The February CPI inflation rate came in at 3.2% year-over-year, holding in a tight range above the 3% level. Many of the key components are seeing a moderation of the rate of inflation, leading the Fed and other market participants to forecast continued disinflation. This is the primary catalyst for the Fed rate cuts later this year.

However, with accelerating economic growth and already loose financial conditions, cutting interest rates will only boost aggregate demand, increasing the risk of a re-acceleration in the rate of inflation. Currently, we continue to see oil prices and commodities move higher, having increased 20% and 13% year-to-date, respectively. These components had been negative contributors to inflation but are now on the cusp of contributing positively once again. The Fed is walking a tight rope, having to assess whether the data supports continued disinflation and moderate growth or whether rate cuts will accelerate both growth and inflation. This is why Fed policymakers have remained cautious in their recent policy statements and remain deliberate in their decision to reduce rates.

The Bottom Line

The stock market is off to an impressive start in 2024, continuing the strong finish to 2023. The S&P 500 has risen approximately 28% off the October 2023 lows and posted a positive return for the 5th consecutive month. Historical precedent suggests a tendency for solid returns over the next year. However, given the length and magnitude of the recent advance and the high level of investor optimism and complacency, the market remains vulnerable to a short-term correction. Despite some leadership concentration issues in the mega-cap growth stocks from earlier this year, the market’s upward trend has been persistent and seems to be broadening to include other sectors, styles, and sizes, providing a healthier backdrop to the overall market.

The advent of artificial intelligence (AI) is real and is having a significant impact on driving an exciting new technology cycle across the entire economy. This could propel old winners to new heights, like Google, Meta, Nvidia, and Microsoft, but it will also create many new winners that are able to either participate in the

increased technology spending or that can harness AI in new and exciting ways to grow their business.

While economic growth is slowing from its torrid 4th quarter pace, estimates for 1st quarter growth are rising and being buoyed by a resurgence in the manufacturing sector where the latest data indicates that the U.S. economy is emerging from the manufacturing recession of the last 18 months. This could help propel corporate earnings growth more broadly, across more sectors, which could serve as a catalyst for stock market performance to continue broadening to a wider segment of companies, which we are already seeing in the form of new highs in the S&P 500 Equal-Weighted Index and the S&P MidCap Index. Lastly, given the attractive valuation of certain segments of the market beyond the mega-cap stocks, the recent surge in corporate carve-outs and public-to-private transactions suggests that there is a lot of value and value creation potential in the public equity markets beyond the mega-caps.

Though financial markets had previously been looking for aggressive interest rate cuts, policymakers have been more cautious in their public statements, focusing on the need to let the data be their guide rather than market expectations. Upward pressures in commodity prices and still elevated (albeit declining) wage growth already suggest that further disinflation may be harder to come by over the next few months. Adding fuel to the fire (no pun intended), with higher oil and commodity prices, a re-acceleration of growth in the manufacturing sector, and already loose and easing financial conditions, cutting rates could very well increase the risk of a resurgence in inflation. While expectations are centered on rate cuts in the back half of the year, we expect cautiousness on the Fed’s part with respect to policy easing and an increasing likelihood that they wait for additional data into the 2nd half of the year.

We continue to favor a diversified approach within portfolios on both the stock and bond front, maintaining exposures across the market cap spectrum in value and growth, along with non-U.S stocks as well. Intermediate-term bonds typically perform well when the Fed cuts rates and the economy grows; however, if any rate cuts were to boost the economy and trigger higher inflation, longer duration, higher quality bonds could struggle relative to shorter duration and lower quality bonds. For this reason, we continue to favor a mix of shorter and intermediate duration bonds. Additionally, we continue to construct portfolios with exposure to niche segments of the private lending market that can offer higher income and returns with lower volatility and uncorrelated risks with traditional stocks and bonds.

Investment Advisory services are provided through Bison Wealth, LLC located at 3550 Lenox Rd NE, Ste 2550 Atlanta, GA 30326 or Bison Advisors, LLC located at 140 Cateechee Trail, Hartwell, GA 30643. Securities offered through Metric Financial, LLC. located at 725 Ponce de Leon Ave. NE Atlanta, GA 30306, member FINRA/SIPC. Bison Wealth, LLC and Metric Financial, LLC are not affiliate entities. More information about Bison Wealth or Bison Advisors  and its fees can be found in their respective Form ADV Part 2, which is available upon request by calling 404-841-2224. Bison Wealth and Bison Advisors are independent investment advisers registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. 

The statements contained herein are based upon the opinions of Bison Wealth, LLC (“Bison”) and the data available at the time of publication and are subject to change at any time without notice. This communication does not constitute investment advice and is for informational purposes only, is not intended to meet the objectives or suitability requirements of any specific individual or account, and does not provide a guarantee that the investment objective of any model will be met. An investor should assess his/her own investment needs based on his/her own financial circumstances and investment objectives. Neither the information nor any opinions expressed herein should be construed as a solicitation or a recommendation by Bison or its affiliates to buy or sell any securities or investments or hire any specific manager. Bison prepared this Update utilizing information from a variety of sources that it believes to be reliable.  It is important to remember that there are risks inherent in any investment and that there is no assurance that any investment, asset class, style or index will provide positive performance over time. Diversification and strategic asset allocation do not guarantee a profit or protect against a loss in a declining markets. Past performance is not a guarantee of future results. All investments are subject to risk, including the loss of principal. 

Index definitions: “U.S. Large Cap” represented by the S&P 500 Index. “U.S. Small Cap” represented by the S&P 600 Index. “International” represented by the MSCI Europe, Australasia, Far East (EAFE) Net Return Index. “Emerging” represented by the MSCI Emerging Markets Net Return Index. “U.S. Aggregate” represented by the Bloomberg U.S. Aggregate Bond Index. “Treasuries” represented by the Bloomberg U.S. Treasury Bond Index. “Short Term Bond” represented by the Bloomberg 1-5 year gov/credit Index. “U.S. High Yield” represented by the Bloomberg U.S. Corporate High Yield Index. “Real Estate” represented by the Dow Jones REIT Index.  “Gold” represented by the LBMA Gold Price Index.  “Bitcoin” represented by the Bitcoin Galaxy Index