Q1 Market Insights

The markets had a strong start to the year, with the S&P 500, Nasdaq, and Dow Jones each hitting all-time highs in the first quarter. In fact, the S&P 500 has reached 22 new record highs so far this year. The economy has remained resilient with low unemployment, strong consumer spending, and healthy household and corporate balance sheets. The S&P 500 is up about 10.5% through March 31st. Like last year, technology stocks have been the leaders. There are signs, however, that the rally may be broadening out to other sectors. The equal weighted S&P 500 (which is not market cap based like the traditional index and weights all stocks evenly) recently hit a record high, as well.

Bonds are down slightly year-to-date as interest rates have risen (bond prices move inversely to interest rates). The Bloomberg US Aggregate Bond Index is down about 0.8% through the first quarter. Bonds remain attractive given their higher current yields and the anticipated interest rate cuts by the Fed. The 10-year US Treasury ended the quarter at 4.2%. We continue to believe that it makes sense to take advantage of current rates and lock in yields, going a little further out in terms of maturity. Please reach out to your Wealth Advisor to talk about any excess cash that you may have. Higher starting interest rates should help the fixed income side of a portfolio play a greater role in achieving long-term returns.

The Federal Reserve has been holding interest rates steady to lower inflation. Inflation was higher than expected in February as elevated prices persisted. The Fed will likely look for more evidence that progress is being made to lower inflation before cutting rates. Many analysts expect the Fed to begin cutting interest rates in 2024. Inflation has fallen significantly from its peak in 2022 but has yet to hit the Fed’s target of 2%. The Fed will likely begin to gradually lower interest rates this year assuming inflation remains under control.

Although the markets aren’t cheap based on current valuation metrics, stocks could continue to climb higher. The current elevated valuations are more concentrated around a handful of individual stocks. Historically, stock market returns have been positive on average during election years. Markets have done well under both parties and the political landscape may not have the impact on the markets that some people expect it to have. It’s important to remember that stock market returns are typically related more to economic and inflation trends instead of election results. We should expect to see some market volatility though given that valuations aren’t cheap. Pullbacks are part of a normal, healthy market. It’s important to stick with an investment strategy that’s focused on your goals and stay disciplined as market conditions change.

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