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Equity Market Rally: In the fourth quarter of 2023 and the first quarter of 2024, the equity markets experienced one of the strongest six-month rallies in recent history. I think of this rally as a “sweet spot rally,” meaning falling inflation and resilient growth created a sweet spot for surging equity prices.
Inflation Surge: March’s hotter-than-expected inflation report brought markets out of the sweet spot. Even after accounting for the outsized contributions of energy, healthcare, and auto insurance costs, price inflation in many large components of the consumer basket remains remarkably stable.
Interest Rate Forecasts: In response to stickier-than-expected inflation, markets revised their forecasts for 2024 interest rate cuts from three rate cuts at the beginning of the month to only one rate cut by the end of the month.
Market Volatility: The continued repricing of rate cuts caused significant volatility in stock and bond markets. Thankfully, the stickier-than-expected inflation has also been accompanied by stronger-than-expected growth. Stock markets stabilized in April as stronger-than-expected growth led to better-than-expected earnings.
Growth and Inflation Trends: Growth and inflation are both slowly slowing. As the delayed effect of interest rate hikes works its way through the economy, growth may begin slowing faster than inflation.
Corporate Earnings: Corporate earnings growth has been good enough to keep equity prices afloat. 77% of S&P 500companies have reported better-than-expected earnings growth (as of May 3, 2024).
Risk Management: In this type of environment, simple risk management strategies like portfolio diversification and downside risk management can be effective tools in a long-term investment strategy. We remind investors that the best way to reach long-term investment goals is to stay disciplined to a long-term investment strategy.
About the Author:
Christian Chan, CFA is the Chief Investment Officer for AssetMark, Inc. and is Senior Vice President of AssetMark Asset Management, where he oversees AssetMark’s proprietary investment strategies.
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable. But its accuracy is not guaranteed and is subject to change.