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2024 First Quarter Market Update & Looking Ahead

As the first quarter of the year came to an end on March 29th, the market began to take a breather. After a blistering 2023 where the S&P 500 surged 26%, the S&P 500 continued that run in the beginning of 2024 to end March up over 10%. Though the market had a strong start, some cracks were beginning to show in the rally and in the two weeks to start the second quarter, the S&P 500 has pulled back to mid-single digits. To look at what’s driving these market movements and determine what the rest of the year might look like it’s important to review the current economic conditions. 

Strong Economic Growth

2023 was a year of strong economic growth and 2024 appears to be heading in that same direction. For the year of 2023, GDP increased at a 3.1% annualized rate. Currently the estimate for economic growth in 1Q2024 is 2.9%. Generally Q1 is a weaker quarter than the others as factors like weather can limit economic production and there can be a slowdown in consumer spending as households digest all their spending from Q4. So far in 2024 winter has been warmer and consumers are continuing to spend which is boosting economic growth and should feed into corporate profits. 

Strong Corporate Profits

Companies are just now beginning to report their earnings for the first quarter of 2024, and while it is much too soon to say anything decisively, early indications are positive. Factset expects earnings to increase 7% for 1Q2024 which would be the third straight quarter of earnings growth. This can be crucial for the markets as stock prices are forward looking. If earnings continue to come in positively, that could lend stability to the markets and justify the run the market has been on. On the other hand, a misstep in earnings could begin a downtrend. 

Inflation

While strong economic growth and growing corporate profits are great for the markets, inflation is really driving the ship. Inflation has been trending lower since 2022 when inflation peaked at over 9%. The March 2024 report showed inflation as measured by the Consumer Price Index (CPI) to be lower, about 3.8% for the prior 12 months. 3.8% is lower than 9%, but when reviewing the past few months, it seems like CPI has been a bit sticky at around that level. The Federal Reserve wants inflation back towards 2% and their main way of getting inflation lower is through interest rates. 

Interest rates

The main reason why inflation getting stuck around 3.5%-4.0% is problematic for the markets and Americans in general is because that means interest rates are likely higher for longer. Interest rates touch almost every individual and business in the country. Higher interest rates generally drive up the cost of goods and services. By raising interest rates, the Federal Reserve can make goods and services more expensive for consumers and in doing so can lower the rate of inflation because people buy less items. Once inflation is lowered, or on a sustainable trend lower, the Federal Reserve can lower rates, hopefully erasing inflation without causing too much pain. Unfortunately, the Federal Reserve is in a tricky spot right now. If they lower rates, one thing they risk is driving up the cost of shelter prices within inflation. Shelter is one of the largest components of inflation. If the Federal Reserve lowers rates, they risk juicing up the real estate market and pushing up the cost of homes as buyers begin buying again. This in turn can push the inflation number up and away from the 2% target. However, if they don’t lower rates, other areas of the economy can begin to struggle. 

What does this mean for the rest of the year?

Realistically, the economy is in good shape. Strong economic growth and corporate profits are evidence of this. Additionally, unemployment has stayed below 4% despite interest rates hitting levels not seen in twenty years. Though, that doesn’t mean the markets will rally indefinitely. After a 10% run to start the year, the current couple percent pullback is healthy. As the year progresses, we need to see how corporate profits play out. Additionally, inflation is likely still headed back down to 2%, but the path to 2% is likely to take longer than was expected just three months ago. We do expect the Federal Reserve to cut at least once this year, but barring a significant slow down, there really isn’t a reason for more than two cuts. The market doesn’t need substantial cuts, just a path towards normalcy.