Q1 2024 Market Update

​Yes, we are in a bull market. No, it is not a bubble. At least not yet.

We spent most of the latter part of last year talking about how markets were poised to turn, and if recent returns have not changed the minds of any remaining bears, nothing will. Of course, this does not mean we are saying throw caution to the wind, we are always mindful of risk. However, with the prevailing negativity, we want to take the opportunity to reaffirm our bull market view. In this area, it seems as though sentiment has improved in recent months. Even though inflation is proving to be sticky around current levels, hard data continues to paint the picture of a solid economic environment and corporate earnings continue to point towards solid growth.

As we entered 2024, the view was that inflation would continue to moderate, allowing the Fed to turn its attention to the labor market and business cycle, where it could judge the state of the economy and act accordingly. While inflation has not slowed much recently, few could have expected a complete
lack of any noteworthy economic weakness. If anything, the data might be signaling a renewed acceleration and the lack of a need to cut rates. As this is happening, the Fed might be sharing more of the spotlight with the economy in the view of investors.
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As a prime example, manufacturing activity is showing signs of life after a protracted decline. Recent data shows that manufacturing returned to expansionary territory for the first time since October 2022. Meanwhile, a key gauge of future economic expectations, measured by the Leading Economic Index, recently turned positive after a two-year run in negative territory. This downturn rivaled (in length) the bust during the financial crisis period from 2007-2009. Any improvements here would only add to growth prospects in the coming quarters.

We spent so much of the last two years focused on inflation and comparisons to the 1970s that we might have missed the forest for the trees. It may prove that the better comparisons for this era are the 1960s or 1990s - highly innovative times of robust economic growth and generally strong stock markets. Government policy is supportive of expanding the US manufacturing base, just as technology is readying to take the next leap forward. This is the era of automation and AI. In its current stage, the hardware buildout is being led by Nvidia and its state-of-the-art GPU chips. Semiconductor stocks, in general, are doing well as orders for AI-related chips are ramping up. Companies are racing to build the capacity to implement AI into their business. The incredible need for data centers to house critical computing components and the intense energy needed to keep everything running is at the center of this phase of the boom. Investors would be wise to remember that the industry is highly cyclical though, and when things are good, as they are now, these stocks can look
infallible. Eventually, every cycle comes to its end as demand inevitably wanes. When this happens, we will move to the next phase of this buildout — software and enterprise applications. In our estimation, AI will continue to be a driving force for the rest of the decade, but today’s winners might not be tomorrow’s, and there will be new industries and companies that ultimately play their part in this story.

Looking back, we have been through a lot in the last four years — a pandemic, two bear markets, two ongoing wars, the last ten Marvel movies, inflation, and a record interest rate hiking cycle. It is astounding how much has happened and how well both the economy and markets have held up. We should take the time to appreciate how good things are right now. Eventually, exuberance, inflation, or some other issue will catch investors with their guard down. Even as we leave room for the unexpected, we believe that we will continue to have a good market environment in the months ahead.

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The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
The Russell 2000 Index is a stock market index that tracks roughly 2000 US small companies, and is considered a key benchmark for US small cap stocks.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
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