Positive equity returns of 2023 continued in the first quarter of 2024 with the S&P500 up another 10%. The quarter saw a healthy broadening of market performance which solidifies the current environment as the early stage of a new bull market. While valuations currently appear elevated, businesses have been increasing earnings expectations and raising dividends. Companies have also been making internal investments to improve operating efficiencies within their organizations. Bull markets typically last three to five years as economic cycles play out.
US economic activity continues to impress with broad-based stability and growth. The jobs market is strong with unemployment remaining below 4%. After contracting for more than a year, manufacturing is finally beginning to expand, adding to an economy that continues to benefit from consistently stable growth in the services sector. Even consumer sentiment has substantially improved this year after three years of significant insecurity due to the pandemic. This positive environment has persisted even as the Fed has held interest rates at restrictive levels while also pursuing quantitative tightening policies.
Inflation and its impact on interest rates remains an important element of market risk going forward in 2024. It is also the source of long-term opportunity. In the near term, the Fed’s job is to guarantee they win their battle with inflation. While the decline rate of inflation has slowed some in recent months, it is still moving lower. The Fed would like the PCE deflator component of inflation to move closer to 2% from its recent level of 2.8% because they realize monetary policy has its limits. Many uncertainties associated with the inflation trend emanate from outside the control of the Fed. Energy prices, supply chain impacts from the existing wars, trade tariffs, and high costs of onshoring manufacturing back into the domestic economy are just a few inflationary wildcards concerning the Fed.
With growth as stable as it’s been, the Fed is unlikely to act quickly to reduce rates; however, it does appear the inflation rate will eventually reach the Fed’s target. The Fed is indicating this is their expectation as well. In addition to the timing of eventual rate cuts, the Fed is beginning to consider reducing the runoff rate within the quantitative tightening program sooner than expected. The potential for loose monetary policy in a low inflation, stable growth environment presents equity investors with a bullish long-term opportunity.
In this positive environment, we expect companies in our clients’ portfolios to continue executing their strategies and accomplishing their goals which include: maintaining strong balance sheets, generating increasing amounts of free cash flow, providing shareholders with increasing returns of capital including dividends and share buybacks, and improving productivity and margins. We see the balance of 2024 as a time to hold equities both as an inflation hedge and for long-term capital appreciation. Inevitable pullbacks are normal and healthy, and not to be construed as changes in an equity-friendly economic environment. As always, we will closely monitor this environment and adjust our views and strategies as warranted by any material shifts.
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Disclosure Statement
SFE Investment Counsel is a Registered Investment Adviser. This presentation is solely for informational purposes and not a solicitation to invest. The results reflect the deduction of fees and the reinvestment of dividends and other earnings. Advisory services are only offered to clients or prospective clients where SFE and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by SFE unless a client service agreement is in place. Please contact a financial advisory professional before making any investment. 801 South Figueroa Street│Suite 610 │Los Angeles CA 90017 │213.612.0220 t │213.612.-0329 f │sfeic.com SEC Registered Investment Advisor