Stolper Perspectives For The Quarter ending March 31, 2024

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On the tails of AI and tech-euphoria perhaps, if we listen closely, we can hear the markets belting out “I’m a rocket ship on my way to Mars” as record after record is obliterated. Queen’s “Don’t Stop Me Now” is, after all, a fitting song title du jour. In further good news, Raymond James economists in their March 22nd report dropped their “very mild recession” call in favor of moving to a “soft landing” scenario for the U.S. economy. Even the Federal Reserve thinks the future is looking bright enough to consider lowering rates soon, although quick to remind us of clouds on the horizon.

The S&P 500 ended the first quarter of 2024 at 5,254, delivering a robust return of 10.56% for the year to date. The Dow Jones Industrial Average (DJIA), lacking as much tech pizzazz, ended March at 39,807 for a lower, but still solid, first-quarter return of 6.14%.

Astoundingly, the S&P 500 has posted over 20 record highs this quarter, breaching 5,000 for the first time. In a largely uninterrupted climb for both indices that kicked off at the end of last October, the DJIA also notched multiple highs, edging closer to a monumental 40,000 milestone. While the mega-tech stocks continue to dominate, the market has shown some encouraging signs of broadening in recent weeks. The S&P 500 Equal Weight Index, which negates the skew caused by the ultra-high cap stocks, broke its all-time high by mid-March and has continued to climb since. Heading into the end of March, 80% of S&P constituents had risen above their respective 200-day moving averages, which is also indicative of a broader rally even if outperformance still rests with a select few names.

Large cap growth stocks continued to offer the best-performing investment style for the first quarter of 2024. However, the performance gap over large cap value has narrowed considerably since 2023 in a sign, perhaps, that industrials, energy, and other long-established and more staid sectors are poised for a catchup phase. With the last 12-month S&P 500 P/E (price/earnings) ratio trading at 23x for the first time since 2000, investors may rotate back toward more reasonably-valued opportunities.

Going into the final week of the quarter, Real Estate is the lone sector showing a negative return, with Communication Services, Information Technology, and Financials leading the gainers, with Energy not far behind. WTI crude oil prices are up close to 16% year-to-date, reaching $83.17/barrel at the end of March, having fallen from above $95/barrel to below $70/barrel from the end of September to mid-December 2023.

Recent Ukrainian strikes on key Russian fuel refineries threaten Russian supply on top of OPEC+ members, led by Saudi Arabia and Russia, announcing the extension of additional voluntary cuts for the second quarter of 2024. The cuts are intended to bolster oil price stability in the face of concern over global growth prospects, notably for China, and rising output outside the group, including from the U.S. and Brazil.

The U.S. economy continues to exhibit resilience. The Atlanta Fed’s GDPNow estimate for real GDP (Gross Domestic Product) growth in the first quarter of 2024 is an annualized 2.1%. This does, however, indicate a measurable slowdown from the U.S. Commerce Department’s Bureau reported fourth quarter 2023 GDP annual growth rate of 3.3%. Last year, in aggregate, Americans made more and spent more, with the economy adding 2.7 million jobs. Inflation-adjusted, or real, disposal personal income rose 4.2% in 2023, contributing to robust consumer confidence despite inflationary pressures.

Housing activity metrics have improved sharply, with existing home sales surging 9.5% month-on-month to the end of February, the fastest rate since February 2023. However, some cracks in the landscape of household financials are showing. According to the latest Federal Reserve Bank of New York quarterly report, total household debt (including mortgages) grew by $212 billion, rising to $17.5 trillion in the fourth quarter of 2023. Credit card balances rose by $50 billion to hit a record $1.13 trillion, with serious delinquency rates rising.

Any unease surrounding household borrowing metrics is, however, eclipsed by the sounding of alarm bells over ballooning federal debt. Philip Swagel, head of the independent Congressional Budget Office (CBO), recently warned that the spiraling of the U.S. fiscal burden was on an “unprecedented” trajectory. According to the CBO, at the end of the 2023 fiscal year last September, federal debt owed by the public (which excludes intragovernmental debt) had risen to $26.2 trillion, or 97% of GDP, and the federal deficit was $1.7 trillion or 6.3% of GDP. By the end of fourth quarter 2023, this figure had risen to $27.0 trillion. The increasing principal, coupled with steeply rising interest rates, caused a whopping 87% rise in net interest costs from fiscal years 2021 to 2023.

Alarmingly, the trajectory of the U.S. debt burden is steepening with, according to current estimates, the figure jumping around $1 trillion every 100 days. The impetus for the steep rise in government debt in recent years has been tax cuts introduced by former President Trump in 2017, further fueled by pandemic stimulus spending, followed by the Infrastructure Investment and Jobs Act and Inflation Reduction Act under President Biden coupled with support for Ukraine in its ongoing conflict against Russia. CBO projections this week show debt-to-GDP levels surpassing their Second World War high of 116% before the end of the decade.

Against this backdrop, it is not surprising that the Federal Reserve, although not in principle a political animal, is no doubt feeling the pressure from both the public and private sectors to signal that interest rate cuts are on the way. But bumpy inflation data and an economy that continues to surprise on the upside are exerting opposite forces. As expected, in March’s Federal Open Market Committee (FOMC) meeting the policy rate was left unchanged at 5.25% – 5.50%. For now, the Fed is still penciling in 75 basis points (0.75%) of expected rate cuts by year-end 2024, although, tellingly, Fed Chairman Jerome Powell has been publicly voicing a lack of conviction among Fed officials that the disinflationary process is here to stay.

The Fed, itself a recipient of its own medicine, posted a net negative income of $114.3 billion in 2023, a record loss largely due to paying substantially more in interest to banks, money funds, and other financial firms to park cash at the central bank, while income from bonds it owns was little changed from 2022. The Fed’s balance sheet has nevertheless been shrinking as it has let Treasury and mortgage bonds run off at close to $95 billion every month, shedding around $1.5 trillion in assets accumulated to help stimulate the economy in the early stages of the pandemic.

Figures released by the Bureau of Labor Statistics showed that The Consumer Price Index (CPI), a broad measure of goods and services costs, increased 0.4% for February, in line with expectations, and 3.2% from a year ago, slightly higher than expected. Excluding volatile food and energy prices, the core CPI rose 0.4% on the month and was up 3.8% on the year, both above forecasts.

The annual figure is well above the Fed’s longstanding 2% target and is being driven in large part by increased energy and shelter costs. Gold, long considered a traditional inflation hedge, hit an all-time high of $2,222.39 on March 21st. Bitcoin, the dominant asset within the notoriously volatile cryptocurrency market, and also touted by some as a store of value due to its supply constraint and distributed protocol, also hit a record high in dollar terms this month, peaking at $73,836 per bitcoin.

Rising debt and the accompanying ballooning interest rate bills don’t appear to be slowing government spending down. In the early hours of Saturday, March 23rd, the Senate passed a $1.2 trillion package of spending bills nearly six months into the budget year that, at the last minute, pushed any threats of a government shutdown to the fall. The day before, the bill had narrowly achieved the required two-thirds majority in the House of Representatives. More than 70% of the money is slated for defense. House Speaker Mike Johnson, who faced a barrage of backlash from fellow Republicans said afterward that the massive omnibus bill “represents the best achievable outcome in a divided government.”

This division is set to be expressed across the nation as both Joe Biden and Donald Trump have now secured their respective parties’ presidential nominations. This November rematch, although met with a lack of enthusiasm by many voters, has loomed as inevitable for months now. Given the highlights of Mr. Biden’s recent State of the Union address, areas of hot debate will include domestic economic conditions, especially for those in middle and lower income brackets, the migrant crisis at our southern border, foreign policy, and the cost of supporting allies and opposing adversaries in conflicts abroad.

Mr. Trump, who has been on a legal rollercoaster, received good news on the March 25th deadline requiring him to post bond to cover a $464 million fraud judgment. Instead, an appeals court granted the former President ten days to post just $175 million to delay enforcement, which could have led to the seizure of cash and properties by the New York attorney general’s office. In separate cases, he is still facing one or more criminal trials, in a first occurrence for a former U.S. president. Mr. Trump’s detractors claim justice is long overdue, while his supporters cry political witch hunt.

Abroad, signs are emerging that 2024 is seeing a return to “normalization” in the global economy, meaning inflation and interest rates reversing back towards more familiar territory following the scramble by central banks to curb overheating conditions initially triggered by emergency stimulus measures. In the UK, inflation hit 3.4% in February, its lowest rate since 2021. In line with the U.S., the Bank of England committee has left rates unchanged at 5.25% at its March 2024 policy meeting.

In the European Union, the economy may be characterized as stalled for now, and the European Central Bank kept borrowing costs at a record high 4% in March. At the same time, remarks indicated that good progress had been made in bringing down inflation, cautiously paving the way for lower rates in June. Also this month, Japan became the last country in the world to end negative interest rates, which have been a drag on its currency, after decades of deflation. Although the country still faces structural challenges, including an aging population, the Bank of Japan said that the economy has “recovered moderately.”

China, critical to the world economy given its size, is implementing monetary easing tools and expressed commitment to efforts aimed at boosting its economy and manufacturing sector, including cutting banks’ reserve requirement ratios.

In Russia, President Putin won re-election in March by a landslide in voting devoid of any credible opposition. February marked two years since Russia’s invasion of Ukraine, and the conflict continues, with Ukraine outgunned and outmanned and recently ceding key territory. A U.S. supplemental military and aid package put forth by President Biden has encountered a partisan logjam but should come to the House floor in April.

In addition to providing military aid to Israel in the country’s efforts to eradicate the terrorist organization of Hamas, the U.S. is also supplying humanitarian relief to the civilian population devastated by the conflict in Gaza. A few days ago, the United Nations Security Council passed a resolution calling for an immediate ceasefire and, this time, America chose to abstain rather than veto.

Here at Stolper Asset Management, we continue to evaluate investment opportunities on their individual merits, to identify opportunities we believe offer long-term value propositions. It helps, of course, when market and macro trends are at our back, but we refrain from predictions at these levels, where change is the only reliable certainty. Spring is a time of renewal, and it is with ever-renewed gratitude that we thank you for the continued trust you place in us as your financial steward.

The S&P 500 is an unmanaged index of 500 widely held companies and over 80% of the U.S. equities market.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 companies maintained and reviewed by the editors of the Wall Street Journal.  The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the investment adviser representatives of Stolper Asset Management and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.  Investing involves risk and you can lose principal.  There is no assurance any strategy will be successful.  There is no guarantee that any forecasts made will come to pass.  Past performance may not be indicative of future results.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Dividends are not guaranteed and must be authorized by the company’s board of directors.

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