GLOBAL MARKETS – THE STOCK MARKET RALLY CONTINUED
Global stock markets finished the quarter on a very strong note. The S&P 500 Index
rose 10.6% while the Dow Jones Industrial Average rose 6.1%. The NASDAQ
composite appreciated 9.3%. The MSCI All Country World Index rose 8.3% with the
Bloomberg U.S. Aggregate Bond Index falling less than one percent. U.S. Treasury
rates rose even as the yield curve remained inverted. The ten-year Treasury yield
at 4.2% was 32 basis points higher at quarter-end versus the prior quarter while
the two-year Treasury yield at 4.6% rose 37 basis points. Our view has not changed,
despite the rally in bonds, the treasury curve inversion connues to bode poorly
for the economy eventually. The three-month U.S.T bill at a yield of 5.37% is 117
basis points higher than the 10-year U.S. Treasury note (narrowing 29 basis points
from last quarter), historically a sign of a forthcoming recession. So far, this me
has been different, no recession on the horizon.
The Federal Reserve is done with further rate increases for this cycle. The FOMC
however connues to slowly reduce their bloated balance sheet. The markets
believe the FOMC will lower rates at least three mes (75 basis points) in 2024,
probably the later half of the year. This was a major reason for the market rally
this quarter. Unchanged from last quarter, we are not inclined to believe in the
three-me reducon. Rising levels of inflaon appear to have abated, maybe only
temporarily, although geng back down to FOMC’s target of two percent is
unlikely in 2024 or even 2025. As we have said ad nauseum, we have yet to see, in
the face of today’s rate of inflaon, now decelerang, the FOMC ghtening unl
they “broke” something. Could this mean a ‘so landing’ for the US economy is in
the offing? Apparently, the global equity markets have already made that
determinaon.
In light of the global rise in interest rates these past three years, we uncovered an
interesng factoid, in early 2021 there was approximately $18 Trillion innegavely yielding debt globally.
Today that stands at a few hundred billion and declining.
The second quarter of 2024 will bring new challenges to the economy and the
markets. As noted last quarter, increases in minimum wages in 27 states are
bringing price pressure to a variety of businesses who will need to either pass
along some, if not all, of those addional expenses or elect a reducon in
headcount.
We believe market volality will connue to be a story in 2024. We are concerned
about a global equity and fixed income market correcon of even more substance
than occurred at several points in 2023. Valuaons, parcularly those that are
specifically technology related, are even more elevated than they were in 2022.
Six of the seven technology companies (formerly known as the ‘Magnificent 7’)
were responsible for the bulk of US equity market performance in 2024 to date.
Comparave valuaons to the 1999/2000 overvalued equity markets should not
be ignored. While fixed income rates have risen this quarter, the interest rate
spread between investment and non-investment grade securies is rather
narrow, not reflecng realies in today’s inflaon-fueled economy. The dollar
was stronger against world currencies this quarter, maybe that will last or maybe
not.
And we repeat: The impact of the war in Ukraine cannot be assimilated into the
global economy with any degree of confidence even aer two years; nor can
Middle East violence. The human and economic tragedies are reminiscent of past
periods of violence and war. These horrors and the aermath of the pandemic
connue to reverberate in the global markets, cauon is warranted.
Our connuing search for and investment in undervalued assets requires paence
and a healthy dose of opmism for humanity.