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Quarterly Review and Outlook: March 2024

"It Is What It Is"

Loyd Johnson Photo

By Loyd Johnson, Chief Investment Officer
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A Look Back

Have you heard this famous phrase used in everyday life? Maybe hundreds of times? Me too, and frustrated at the seeming ambivalence of it, decided to find out where it came from. The real answer is that we are not entirely sure, but the best evidence I’ve seen is that the earliest known written use of the phrase dates back to 1949 in a Nebraska State Journal article written by J.E. Lawrence. In it he said, “New land is harsh, and vigorous and sturdy. It scorns evidence of weakness. There is nothing of sham or hypocrisy in it. It is what it is, without apology.”

Well, since then, it has become a common saying in English-speaking countries. It is often used as an expression of frustration or resigned acceptance of current circumstances, and it has made its way into everyday conversations regarding financial markets. Employers having to deal with tighter labor markets, or consumers having to pay more for goods and services as a result of higher inflation…”it is what it is.”

When the Fed took short-term interest rates to zero as a result of Covid, it pushed many investors into taking on more risk, and buying stocks as they looked for yield. It was what it was. Then, as the Fed drastically raised interest rates as a result of a rapid increase in overall inflation, stocks and bonds both suffered in 2022. It was what it was. The more interesting thing is that stocks, especially Large-Cap domestic stocks, performed extremely well in 2023 and into the first quarter of this year. That has been a little more difficult to explain…and has pushed valuations higher. Of course, it is rarely that simple.

There are typically so many factors that can and do affect specific asset class performance. We, along with our competitors, spend much time looking at and analyzing those factors that we know about, and of course there are always things out there that we don’t know about that can significantly affect overall returns. That happened over the weekend with the Iranian attacks on Israel. It has been reported that the U.S. was involved in intercepting multiple drone attacks to date. Markets initially reacted negatively in the face of some uncertainty, and have since stabilized. We talk about these unknowns quite often, because we know they happen…we don’t know when, and we usually do not know the short-term consequences.

However, our financial markets have digested these types of unfortunate events quite successfully over the last 120 years or so over the long-term. We focus now on the more shorter-term. We just experienced one of the better first quarters for Large-Cap U.S. stocks in 2024, as the S&P 500 was up 10.56%. On top of an extreme rally in November-December of last year, the major index is up nearly 25% in five months! Although, not nearly as substantial, other stock benchmarks showed positive returns in the quarter. The other major component of most investment allocations, bonds, did not perform well. The “great pivot” of the Fed starting to lower short-term rates hasn’t materialized as of yet and the proverbial can continues to get kicked down the road. With that, the Bloomberg Aggregate returned -.78% in the quarter, and 1.70% over the last year. Commodities stand out as another strong asset class so far in 2024, as oil and gold continued their rally.

The chart below shows just how strong the S&P 500 has been. The index made 22 new all-time highs so far in the year. More importantly, there has been almost no significant downside volatility in a long, long time. As of the end of the quarter, it had been 280 days without a 2% down day, when the average period is 29 days. You can add on another 17 days in April. It certainly doesn’t mean that the index can’t keep pushing forward, but rather, at all-time highs and an extended period of no downside volatility, many things may have to go just right and when a curve ball comes it may be a little harder to hit.

The next chart shows just how bullish money managers as a group have become over the last six months or so. As you look back over the last 24 years, you notice that when managers get too positive or too negative it tends to be a contra-indicator to future performance. Sentiment was particularly negative one month into Covid in 2020. It was equally extreme on the positive side after a 20-month rally into the end of 2022. In both cases, the S&P 500 had decidedly opposite moves following the readings. The current bullish readings are not at the levels of 2022, but coupled with the previous chart, might at least point for a need of a pause and potential consolidation.

The Asset Class Returns are updated as of March 31st. The top four leaders are the same four that led in 2023. It is always helpful to see how the diversified allocation white box in this asset allocation sample consistently performs…never the best, and usually in the middle to upper-middle of the overall rankings.

A Look Forward

Clients that read these monthly and quarterly updates consistently have probably heard me use this line, “the holy grail in our business is delivering the most amount of return with the least amount of risk.” If you ponder that a bit, it really should make some sense, and maybe even falls into the category of “it is what it is.” It’s a never-ending balancing act in looking at the investment landscape and matching that with each client’s own individual risk tolerances and trying to match their goals with an investment strategy that can achieve those goals with the least amount of risk possible. In doing so, you rely on long-lasting principles and asset class correlations, along with current valuations and economic conditions. It is with this backdrop that we show the following chart.


Cash or money market funds have been a real alternative for investors over the last year as the Fed increased short-term rates. Our own internal institutional money fund has hovered around 5.2% for months. Not so bad. However, we do believe that core fixed income (bonds) has the potential to deliver outsized returns over the next couple of years. The chart clearly shows that
you would rather be a little early in making this decision than a little late, but in either case fixed income outperforms Cash when the Fed starts lowering the Fed Funds rate. Of course, when that pivot actually happens has been a source of some pretty hot debate. Coming into 2024, there was consensus that the Fed would cut rates five to six times throughout the year for a total of 1.5%. That would have taken the Fed Funds rate down to around 4%. But, some unexpected things have occurred in the first part of 2024. The U.S. economy still looks pretty good from a macro view. Jobs are plentiful, as the latest unemployment rate stands at 3.8%. People are still spending money. The latest retail sales number in March jumped up .7%, much higher than the expected .3%. We get some of the best intel as we talk to our clients with small to medium-sized businesses. Almost without exception, they are performing well.

Probably the most consistent thing we hear is the difficulty in getting and keeping quality employees. These kinds of things are not normally the precursor for a serious economic downturn. But…that pesky inflation. We highlighted months ago that we believed it would be likely that the move from 9% inflation seen in 2022 to lower levels would be fairly straightforward. However, the move from current levels to the Fed’s preferred level of 2-2.5% could be much more sticky and problematic. We all have experienced the phenomenon of prices for goods going higher quickly and not coming down nearly as fast. Alas, that seems to be where we stand currently…and higher, stickier inflation takes a real toll on the average consumer, as they pay more for groceries and gas, etc.

We end on a more positive note with the next chart. It shows how both the S&P 500 and 10 year treasuries have performed in the months leading up to and following the end of a Fed rate-hiking cycle. The orange line is the current situation. The stock index has done particularly well since the last rate hike in July of 2023. The treasuries are about flat. This gets back to why we like the longer-term prospect of the fixed income asset class. By definition, as rates trend lower, the prices on bond/treasuries go higher and lead to positive returns. It is just math. The trickier part has been identifying when the rate-decreasing cycle will begin. We recently reduced our allocation on stocks back to a neutral status, taking advantage of the run-up in the first quarter. We remain constructive on bonds for the reasons highlighted, understanding that we may need to be patient as the Fed watches the incoming economic data. Markets historically hate uncertainty, and we have a little bit of that now with the delay in rate cuts and the various geopolitical landmines seemingly always out there. When you couple that with healthier than normal returns in stocks and a prolonged period of limited downside, it also makes sense to trim profits where you have them. In that sense, it really is what it is...

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