How is the economy doing in 2024 and what might we expect going forward?
If inflation is going down, why am I still paying more for things like groceries?
How are stocks and bonds performing so far this year?

Beacon Wealth Consultants’ Hillary Sunderland and Cassandra Laymon discuss the state of the economy and the market performance in the first quarter of 2024.

Watch the video to learn more!

If you have any questions about your financial situation, please reach out to your wealth advisor and we would be glad to address them for you. Thank you for being a valued client of ours.

Full transcript below.

 

Cassie:
Hi Hillary. It is the beginning of the second quarter. Can you believe it? The year is flying by.

Hillary:
Sure is Cassie.

Cassie:
Well, I thought we would get together and talk a little bit about what has happened in the first quarter. So why don’t you just start off by telling us how is the economy doing?

Hillary:
So the economy has been very resilient despite facing numerous challenges in 2023. You can see here that economic growth came in at 3.1% year over year in the fourth quarter of 2023. And for this year we should see another year of expansion.

The latest projections from the Federal Reserve signaled that we should see above trend growth of about 2.1% for 2024 and decent growth in 2025 and 2026 as well. So that is an encouraging backdrop.

Of note, the unemployment rate has remained at or below 4% since December of 2022, which is actually the longest streak of such a low level of unemployment since the late 1960s.

The other positive thing we’ve seen is that inflation has fallen significantly since its June, 2022 peak of 9.1%, although it has been stubbornly hovering around that 3.2% level since October.

You can see the components of inflation here and one area that remains elevated is shelter in dark blue and auto insurance in dark red.

And perhaps like me, you’ve had sticker shock when you auto insurance renewal came in this year. Those rates are up substantially because the cost of replacing damaged cars has risen and there’s been an increase in claims from natural disasters.

But we do think that’s going to roll over through the data later this year, which should help price pressures ease substantially and bring down that inflation rate, which would give the Federal Reserve room to reduce interest rates later this year. So overall, the data continued to reflect a good level of economic activity, a healthy labor market, and softening inflation all which is good for a market backdrop.

Cassie:
Okay, I’m going to back you up a minute here because you said inflation is falling and I know when I go to the store I’m not seeing the prices come down. In fact, I am even seeing prices go up. So how do you explain that?

Hillary:
Yeah, that’s a great question. One we receive a lot from clients. So inflation is the increase in the average level of prices. It tells you how quickly the price level is rising. So for example, in 2022, inflation was running just above 9%. Today it’s running just above 3%. So prices are rising, but they’re rising at a slower rate than they were before.

I like to think about it like driving a car. The driver can go faster, accelerate to 70 miles per hour or slower by taking your foot off the gas and then coasting around 40 miles per hour. In both cases, the driver’s still moving forward in the car, but you’re moving forward at different rates. So when you hear on the news or when you hear me talking about inflation is falling, it means that prices are still rising, but not at the same rate they were before.

Cassie:
Okay, well that is helpful. Thank you for that. Well, so with that backdrop, can you just tell us a little bit about what happened with stocks and bonds in the first quarter of this year?

Hillary:
Sure. We had a really good start to the year with domestic large cap stocks. Once again, leading the way, the S&P 500 index was up 10.56% for the first quarter, and artificial intelligence related names continue to have a very outsized influence on the overall returns. However, we did see the rally broaden out into other areas of the market, especially towards the end of the quarter with small cap stocks showing some signs of life. Again, up a little over 5% year to date.

Outside the us, Japanese stocks hit fresh highs. European stocks also rose, and the broad emerging markets index posted a small positive return. We did see slight negative returns for bond investors and a small gain in the broad commodities markets as well.

Cassie:
Okay. Well with all of that, tell me what do you think are the areas of the market that have been most frustrating for investors so far this year?

Hillary:
Yeah, great question Cassie. So one area of the market that has been frustrating is fixed income. So even though markets such as large cap stocks have rallied over the last five months, more conservative investors have likely been frustrated by returns because a larger portion of their portfolio is invested in bonds.

And although bonds had a positive return in 2023, as I just showed you, they are down slightly so far this year. And that’s largely due to that inflation story we were talking about. The fact that inflation has been very sticky around the same level for many months has led to quite a bit of volatility and interest rates. But we remain very constructive on the asset class going forward for two reasons. First, starting yields are highly correlated to future returns and yields today are some of the highest yields we’ve seen for the better part of a decade and second, the Federal Reserve is expected to cut interest rates in the latter half of 2024.

Bond prices rise when interest rates fall, which adds an additional source of return potential for investors. So overall, the outlook for bonds is the best we’ve seen in many, many years. It’s just taking a bit of time to play out and more conservative investors need to be patient.

The other area that’s been frustrating for investors is small cap stocks. This chart shows the calendar year returns for each major asset class going back to 2009, and the asset classes are ranked from the best return to the top to the lowest at the bottom. Usually what we see is that small cap stocks, which are the orange boxes on this chart, tend to outpace return of large cap stocks, the green boxes when equity markets are rallying. However, small caps have been suffering their worst run of performance relative to large cap stocks in more than 20 years, and they’ve really been weighed down by that high interest rate environment that we’ve been in.

And that’s left the asset class trading at near record valuation discounts relative to large cap stocks. In fact, the only other time we’ve seen small caps is cheap was during the 1999 and 2000 time period, and that ended up being a great decade that followed for small cap.

So while it has been a frustrating string of performance for investors in those areas, especially faith-based investors like ourselves, given that our portfolios tend to be tilted toward small cap companies and away from large cap, there is a catalyst on the horizon. We do believe that the Federal Reserve will cut interest rates in the second half of 2024. And when that happens, profits, and hence earnings should rebound for a lot of those small cap stocks which would benefit investors. So again, investors just need to be patient.

Cassie:
Alright, well thank you Hillary. I always appreciate your insights about what’s happening in the markets. I know our clients do as well, and I always appreciate ending on an encouraging note of some things to look forward to in the year ahead. Thanks so much.

Hillary:
Thanks, Cassie.