James Fereday
Chief Investment Officer

If 2023’s market returns of 26% for the S&P 500 and 44% for the Nasdaq Composite weren’t enough, we started 2024 with a 10.6% return on the S&P 500 and a 9.3% return on the Nasdaq Composite. What is vastly different though, in last year’s and first quarter returns, is the spread between the S&P and Nasdaq returns. What we are seeing is the fizzle of some of the technology names that greatly propped up both indices last year, especially the Nasdaq. Many are familiar with the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) but it is the underperformance of some of those names that have helped close the performance gap. Apple and Tesla fell 11% and almost 30%, respectively, in the first quarter. We have also seen other sectors contributing to the rise such as energy, financials, and industrials. It’s encouraging that it is not just a select few that are driving the run but rather a more evenly distributed contribution across market sectors.

Why is this? We attribute it to the avoidance of an expected recession, anticipation of interest rate cuts this year, moderating inflation, continued low unemployment, and optimism around artificial intelligence and its impact on economic growth. With these positives comes an increase in equity valuations. The S&P 500’s forward price-to-earnings ratio has climbed to around 21, the highest level in more than two years according to LSEG Datastream. These higher valuations, coupled with the bond market returning -.8% for the first quarter as measured by the Barclays Aggregate Bond Index, make for an attractive entry point for fixed income. Interest rate cuts are slated to begin later this year but are subject to change with economic reports. We have lowered our expectations for the number of rate cuts this year to two or three (down from an estimated six). This acceptance of “higher rates for longer” is what helped push rates higher in the first quarter, contributing to an attractive entry point to fixed income.

To that end, one of the moves we made in asset allocation during the quarter was to increase our exposure to fixed income. That increase came from decreasing our natural resources exposure, where we were slightly overweight, which has worked well given the run up in energy year-to-date. Part of that run up in energy is, of course, attributed to geopolitical tensions in Russia, Ukraine and the Middle East. That, coupled with an election year in more than 60 countries, including the United States, creates risks that could impact domestic economic growth as well as global growth, and are areas we continue to keep an eye on.

Another trend we have seen in the first quarter is a closing of the gap in performance of growth and value stocks. In 2023, growth stocks outperformed value stocks by more than 30%. So far this year, growth has only outperformed value by around 2%. This trend bodes well for our philosophy of buying high quality, appropriately valued, dividend-paying stocks (i.e., “value” stocks). Coupling these stocks with diversifiers of small and mid-cap stocks, international developed and emerging market stocks, real estate, commodities, and appropriate fixed income exposure, continues to provide the foundation to our clients’ accounts that help to mitigate risk.

We have not experienced a 5% pullback in the S&P 500 Index since October 2023, and with those occurring on average three times per year, we are due. We would see a pullback as an opportunity to add to names that have been hit harder than others and to remind our clients that pullbacks are normal and healthy for the market.

We appreciate your trust and confidence in our team and look forward to talking with and seeing you this year. Please reach out to us with questions you might have. We wish you and your families all the best as we navigate 2024.