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As we enter the second quarter of the year all major indexes finished Q1 with positive returns. One of the largest movers was the S&P 500, up 10.16% for the first quarter. Despite the ongoing discussions about a possible recession, the Federal Reserve is holding back on cutting interest rates because of strong job reports and higher GDP growth; the market has remained bullish and has continued its uptrend since October last year. Setting the current economic condition aside, the overall market trend has been positive, with the S&P 500 hitting new highs earlier this year. We can confidently say that rate increases are over, as they have remained at the same level since July 2023, and inflation continues to decline. All things considered, the economic outlook remains uncertain. We continue to watch the unemployment and CPI reports as these are determinants of when and if the Fed will reduce interest rates later this year.
Inflation
The March inflation report released by the U.S. Bureau of Labor Statistics on April 10th, 2024, showed CPI was up 3.5% YoY, a .3pp increase from February's report. The previous time we saw CPI over 3.5% was back in September of last year. It's important to highlight the top contributors to the CPI increase. The main contributors for this month were Shelter and Gasoline, and when combined, they made up more than half of the monthly increase. Looking at individual categories, prices for shelter, transportation services, electricity, and food away from home remain elevated on a 12-month unadjusted basis.
Moreover, remember that the Federal Reserve's key inflation indicator is Core PCE
(Personal Consumption Expenditures). Core PCE has been on a downtrend since
September 2022 but has not experienced an increase since January 2023. Looking at the chart, we can see that Core PCE as of February has declined to 2.8% (the March report will be released on 4/26). Meanwhile, the U.S. Producer Price Index (PPI) rose to 2.1% YoY, a .5 pp increase from the previous month and its highest increase since April 2023. The overall trend for both CPI and PPI has been downward, but it has not reached levels low enough for the Fed to implement a rate cut.
Interest Rates
Investors have patiently waited for a rate cut since the end of 2023. The Fed's forward guidance has maintained optimism as investors anticipate future rate cuts. Economic growth has continued, job gains remain strong, and nonfarm payroll increased by 303,00 in March, with the unemployment rate rising by .1 pp to 3.8% YoY, still at healthy levels, which could be one of the reasons why the Fed has been hesitant to bring down rates. As mentioned in their press releases, The Fed will continuously assess the current economic environment and make projections that reflect new incoming data. During their most recent Federal Open Market Committee (FOMC) meeting, they kept interest rates at the same target level of 5.25%-5.5%.
This meeting was associated with a summary of economic projections, which helps forecast where the Fed expects GDP, unemployment, inflation, and interest rates to be in the next few years. Compared to December's projections, the change in real GDP and Core PCE projections were higher than in December's projections. As for the federal funds rate, their 2024 projection remains at 4.6%. However, PCE for March may come in higher than expected, potentially pushing out June's rate cut to July or September and reducing the number of rate cuts (previously three) that will take place before the end of the year.
Market Overview
The economy remains resilient, and a few economic indicators have turned positive, which makes achieving a soft landing more probable. This turn of events does not mean a recession is out of the woods. Nevertheless, the market has continued its uptrend bias/trend and has rewarded persistent investors. It's important to recall the notorious "Magnificent Seven"; they were the main drivers of the S&P's performance in 2023. This time might differ; three stocks returned less than the S&P and entered negative territory during Q1 2024. Despite the underperformance of three of the Magnificent Seven, we have the top five S&P holdings contributing about 34.2% of the performance during Q1 2024. Most of these companies belong to the Technology sector, and their performance is driven by growth opportunities expected from AI. Some analysts say it may be premature to determine whether this trend will continue.
CWM Portfolios
As always, Corinthian's main focus is to create portfolios that can tolerate market noise and attempt to reduce volatility caused by ever-present risks. The market is affected by
many factors and constantly digests new information, but having a diversified portfolio can help mitigate some of those risks.
As the Federal Reserve continues to allude to possible rate cuts during the second half of the year, we have begun repositioning our fixed-income portfolios. Over the last two years, we increased our allocation to short-term government bonds, but as interest rates decline, we believe there is potential for higher returns in other bond market sectors. In preparation for the foreseeable rate cut, we've added some longer-duration bond funds and different sectors to benefit from the downward shift in interest rates.
As always, we encourage you to contact Corinthian Wealth Management about any life-changing events, as certain circumstances may require updates to your current portfolio. Remember that we are a team, and you and your main advisor should work together to ensure the portfolio reflects your current needs. Contact us at (408)995-0915 or contact your main advisor with any questions.
Advisory services offered through Corinthian Wealth Management, Inc. a Registered Investment
Sources
The Anatomy of a Recession, Second Quarter 2024 Presentation by Clearbridge and Franklin Templeton. https://www.franklintempleton.com/insights/anatomy-of-a-recession#resources
Market Monitor, April 12th, 2024. Goldman Sachs. Gsam.com