The U.S. economy’s resilience to high interest rates continued in the first quarter of 2024. Despite widespread expectations for an economic downturn, 2023 ended on a high note, with 3.2% growth in the fourth quarter marking the sixth consecutive quarter of growth at or above market, which in turn is supporting strong consumer spending. However, rising delinquencies on consumer loans and household savings returning to pre-pandemic levels are two signs of emerging stress on the American consumer.
The strength of the U.S. economy reduces the Federal Reserve’s appetite for rate cuts. Indeed, strong labor market data in the first quarter suggests the Fed will not be in a hurry to reduce interest rates. U.S. employers added 303,000 jobs in March, which was well above the 200,000 jobs economists expected. Wage growth was more subdued, with average hourly earnings growing 4.1% from a year ago – the smallest gain since 2021. The market continues to hope that the labor market softens just enough to create a path to lower rates. With a surge in immigration (and the supply of labor) from a year ago, it is possible that the economy can keep adding jobs without pushing the unemployment rate too low or pushing wages up.
Will the Fed’s 2% inflation target prove elusive? While year-over-year CPI has fallen from a high of 9.1% in June 2022, there are fresh concerns that progress towards the Fed’s target has stalled and that components of inflation will be sticky. Inflation has hung around 3.2% since October. This may be partially explained by an acceleration in prices for energy and “transportation services” like automobile insurance and repair costs.
After several years of low fixed income yields, the last two years have offered investors attractive income streams. Given the strength of the economy and stickiness of inflation, the Federal Reserve’s next steps – and the outlook for interest rates – are uncertain. Notably, credit spreads are tight – an indicator that risk appetite in bond markets is increasing. Credit spreads represent what investors demand to be paid to take on additional credit risk, and are decreasing. While we question if certain fixed income investors are being adequately compensated for the risk taken, bonds generally remain an attractive source of income. We continue to focus on quality and liquidity, and, as always, we are flexible and opportunistic in our approach. This includes looking for opportunities to slightly extend maturities to lock in higher yields.
The stock market rally continued in the first quarter of 2024 with the S&P 500 Index reaching new all-time highs in March as optimism for a soft landing for the U.S. economy and improved corporate earnings reports fueled bullish sentiment. Despite still-high interest rates, as with the bond market, risk appetite is abundant in the stock market. A speculative mood has returned, with AI-related stocks leading the way. With tech stocks’ market capitalization share outpacing their corporate earnings share, we wonder if excitement over advances in artificial intelligence is making investors forget that technology company earnings have been cyclical. While excited for the potential behind advances in technology, we prefer to focus on long-term business fundamentals and price – and expect the next several years to favor disciplined investors. We remember that, historically, concentrated bull markets eventually reverse, improving the return potential for more attractively priced stocks.
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.
