April 2024
Market Update

Financial Markets

Inflation – Beneath the Headline

All the news sites reported that the core personal-consumption expenditures (PCE) price index, (the Fed focuses on this), came in at expectations +2.5% Feb vs year ago. However, when watching government economic releases, the learning is in the direction of the revisions. The core PCE was revised up for January to an annualized month-to-month growth rate of 5.6% (up from 5.1%), and the index for core services to an annualized rate of 7.9% (up from the original 7.1%). Inflation is now solidly entrenched in core services, as shown in chart below.

Fed Boxed-In

Inflation is still too high to justify rates cuts anytime soon and the government is getting crushed by the interest on debt that is now over a Trillion and rapidly rising (see chart). It may hit $1.6 trillion rate annual by years end.

Interest on the debt causes enormous pressure on the Fed to cut interest rates, despite whatever the inflation data says. There is even talk of the Fed raising its 2% inflation target!

Good news is the US economy continues to grow at a solid pace (4th Quarter GDP revised higher), driven by consumers’ spending “till they drop” and surging corporate profits. Traditionally a strong economy would never support rate cuts, yet Fed positioning and the markets expectations align to about 3 rate cuts in 2024.

Global Rates

With wage inflation surging, the Bank of Japan hiked rates for the first time since 2007, ending their negative interest rate era. In 202, 21 countries had negative rates. Japan was the last to abandon this strange path.1

Most central banks, to boost economic growth, are set to embark on synchronized rate cuts.

Risk assets surged in the first quarter pushing the SP500 up ~+10%. This +10% far exceeded all forecasts, with the average strategist forecasting a gain of <2%. It now exceeds every year-end forecast but one.

How did we get here? It started last fall, with the market’s pivot due to expectations of Fed Rate cuts (and certainly no more rate increases), see chart.

Once the trend was firmly established, the animal spirits of a bull market have continued on their own momentum, even as rate cut expectations dropped. Year to date equities, oil, gold, bitcoin are all surging higher; interestingly, these are the assets you would expect to outperform if the market expected longer term inflation! This is a sustained bull market with all the classic signs of surging sentiment, high earning expectations, high valuations, and subdued volatility. Fundamentals are supportive, with a solid economy, rising corporate profits and a Fed that wants to talk the market up.

Our systematic modeling and research have us staying invested. In March, the stellar meg-cap tech growth broadened out in a healthy market rotation into small caps and equal weight S&P500. Although we continue to overweight towards large-cap, we are diversified with mid- and small-cap in our Core Equity strategy. On the bonds, high yielding income sectors also saw growth rotation to new areas like Real Estate. Our Total Return Bond Strategy remains in a “Risk-On” position, still fully allocated. We continue to favor senior loan/floating rate positions, which are less interest rate sensitive and have more attractive yields.

We do anticipate volatility and bumps along the path in the coming months, and we will quickly adjust if our models’ signals change. In the meantime, it is full steam ahead! As always, if you are concerned about your risk level, please reach out to us, and schedule a time to review your allocation and financial plan.

If you have any questions, please do not hesitate to contact our office at 480-348-2100.

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