Investment Planning

After a hot first quarter, we’re left feeling that the market has begun to cool off just as the weather warms up here in the upper Midwest. With a mix of rising interest rates and tempered expectations for Federal Reserve rate cuts, we’ve begun to feel a slight market chill. Nevertheless, and despite some hubbub over inflation and interest rates, we believe the market will remain healthy. Our very own Chief Investment Strategist, Nate Zeller, breaks down why.

Q1 and Q2 In A Few Recording Breaking Numbers

Wall Street continued its hot streak in March, extending its rally to a fifth straight month.  The S&P 500 returned over 10% in the first quarter of the year; the best first-quarter performance for the index since 2019!

The second quarter has gotten off to a cool start for stocks as interest rates moved higher. Following comments from officials at the Federal Reserve, expectations for the number of interest rate cuts this year were damped, sending bond yields higher. Yields on 10-year U.S. Treasury bonds recently touched their highest point in 2024. 

What’s To Come of The Fed’s Hold Steady?

Investors remain cautious about the pace of the Fed’s rate-cutting timeline this year and how soon central bankers will be able to meet their 2% inflation target. As expected, the Fed held interest rates steady at their March meeting and officials have indicated they are in no hurry to cut as economic growth remains strong and inflation remains above target. 

Many “experts” and prognosticators on television and the internet would lead us to believe that if the Fed does not cut rates this year it could spell disaster for the stock market. We do not think this is the case, and, in fact, believe the opposite to be true. If the Fed does not cut rates, it is because economic activity and the labor market remain strong. Economic growth generally leads to corporate earnings growth, helping provide a tailwind for stocks. The Fed cutting rates as a result of slowing economic growth could be a bad omen for the stock market. 

An ideal scenario would be lower inflation while the economy remains healthy, but this may be unlikely since robust economic growth typically leads to inflation. There is also the prospect that inflation reverses course and moves higher, forcing the Fed to raise rates. While this may seem doubtful, it does remain a possibility, especially in light of the recent rise in commodity prices – namely oil.  

An Overvalued Stock Market and Broadening Momentum

Indications signal the overall stock market is overvalued when compared to historical measures. The question is whether earnings will continue to grow to support lofty share prices or if prices will fall to be more in line with long-term averages. Nothing mandates that stock prices must trade at certain valuations and, as we know, the market can remain irrational for a very long time. However, over time, the market always seems to “revert to the mean”, so eventually, we are likely to see either a pullback in prices or an acceleration in earnings growth.

The emergence of the “Magnificent Seven” stocks last year led markets higher but not all stocks and sectors participated in the rally. The performance of the major market indices was primarily driven by these seven stocks which now make up a large concentration of cap-weighted indices.  Currently, there is added risk in investing in passive strategies that track these indices, since they are heavily weighted to this small handful of stocks. 

We are not necessarily expecting a pullback in these names, since most are very strong companies with solid and rapidly growing earnings, but we do anticipate a broadening of the upward momentum to include a wider array of stocks in sectors outside of technology which will provide opportunities for active management strategies.   

Protection Strategies To Mitigate Your Investment Risk

With the stock markets trading near all-time highs and a sense the market is overbought, we fully understand there may be some trepidation amongst investors when it comes to putting new money into the market. Remember, stock market investing is a long-term endeavor and there are times of volatility.  Historically, patient and disciplined investors have been rewarded.  There are many protection strategies available which provide stock market participation while protecting against downside risk. If you’re interested in learning more about how various strategies might make sense for you, give us a call at 952-460-3290.

Secured Retirement’s Chief Investment Strategist, Nate Zeller, dives into the current trends shaping the US economy. As we wrap up the year’s first quarter, there are a number of market indicators shedding light on the year’s possible economic progression. Nate rounds up leading economist forecasts to help illuminate our way forward. Here’s where we’ve been and where we’re going in 2024:

Navigating Strong Currents and A Robust Economy

This year is starting out on a positive note with the stock markets continuing to move higher as we progress in 2024. The S&P 500 and Nasdaq closed at all-time highs at the end of February. And the market advance is not just limited to large-cap stocks, small-cap stocks, represented by the Russell 2000 Index, have also rallied. These stock market gains come on the heels of the U.S. economy remaining stronger than expected, with Q4 2023 GDP growing at more than 3% compared to the prior year. In turn, the Federal Reserve has been compelled to hold interest rates steady. Robust consumer spending rates and solid employment numbers are additional indicators of a strong economy. Unemployment has ticked slightly upwards, but the most recent numbers indicate an overall healthy labor market.

Inflation, Stubborn Inflation

Inflation, as measured by the Consumer Price Index, does continue to fall but remains stubbornly above the Fed’s comfort level of an annualized 2%. At the beginning of the year, it was expected that the Fed would cut interest rates six times over 2024. However, with the continued strength of the economy and the fact that inflation remains somewhat stubborn, current forecasts predict fewer cuts. Some economists even predict there may not be any rate cuts this entire year.

With the lowered likelihood of the Federal Reserve cutting interest rates, bond yields moved higher – the major bond indices showing negative performance year-to-date. Let this be a reminder that interest rates remain volatile and bonds may not provide the best protection for your portfolio.

Supply, Demand, Mortgage Rates

For a full 18 months (and counting), we’ve been experiencing an inverted yield curve, where short-term interest rates are higher than longer-term interest rates. If the Fed were to cut short-term rates, we’d expect the yield curve to normalize, since it’s unlikely that longer-term interest rates will move much this year. Sorry prospective home buyers, mortgage rates, which are tied closely to the US 10-year Treasury bond yield, may not move much either. If for some reason mortgage rates were to drop, more buyers could have the opportunity to enter the market. However, with supply remaining scarce, this may cause home prices to rise, further leading to inflation.

A “Landing” Economy? What’s That?

Over the past couple of years, we’ve been said to be in a “landing economy”.  “Landing,” refers to the anticipated slowdown caused by the inflation spike in 2022 and subsequent brisk pace of rate hikes by the Federal Reserve. Some forecasts predicted a “hard” landing, meaning the economy would fall into a moderate to deep recession, but more recently the majority of economists anticipate a “soft” landing with a rather mild recession. Given the current resilient state of the economy, the prevailing thought is of “no” landing, meaning the economy will not fall into a recession and continue to expand. How it will play out remains to be seen. In the case of no landing, the Fed would likely not cut interest rates for the foreseeable future out of concern for inflation rearing its ugly head as the economy expands.

The Fed and The Election

The Fed’s inaction could also be an effort not to influence November’s presidential election. Therefore, it may be unlikely they’ll do anything in July or September, leaving only two meetings (not including next week’s meeting where it is highly anticipated they will hold rates steady) for opportunities of rate cuts prior to the election, so chances are waning.  However, this forecast could change should we see the economy fall into a recession or conditions shift drastically, but this seems unlikely in the near term. And there are two meetings after the election this year, so odds of multiple rate cuts in 2024 do remain.  

Through the remainder of the year, we will be watching what effects the political landscape and upcoming elections have on the stock and bond markets. Historically stock markets perform well in election years, but what we have experienced over the past several years have been called “unprecedented” so there certainly is no guarantee we will follow history.

Cautiously Witnessing Tech Titans

The biggest concern we have now is the stretched valuations of the mega-cap tech stocks. In 2023, we saw the emergence of the “Magnificent Seven” stocks which led markets higher and accounted for 62% of the S&P 500’s return. But those original seven have now shrunken to the “Fabulous Four” so far in 2024, with Nvidia, Meta (Facebook), Microsoft, and Amazon accounting for 55% of the index’s returns through the end of February. We remain cautious as narrow market breadth can lead to drawdowns of major indices if that concentration of stocks were to lose value. It remains to be seen if the current market leaders will be able to generate enough earnings growth to justify their lofty valuations and as well as maintain such positive sentiment amongst investors. Until there is a broadening of market leadership, we remain slightly cautious on the markets.  

As laid out by market indicators and economists across the country, there are possibilities for how the economy will progress as 2024 continues to unfold. Inflation continues to play a role in the equation and the status as an election year leads us to closely monitor this delicate balance in the face of The Fed’s current inaction. However, the resilience of the U.S. economy, with its GDP growth, healthy consumer spending, and employment figures, sets a promising tone for the year ahead! 

For more insight into the wide world of finances and how economic trends factor into your retirement, don’t hesitate to reach out to us today at 952-460-3290.