Weekly Wisdom – April 3, 2024

By Hightower Great Lakes on April 3, 2024

Q1 Market Recap

U.S. equity markets continued the strong trend set last quarter with the S&P 500 closing up +10.16% for the best performance to start a year since 2019. The S&P 500 is up 28% since its October low.

This marks the first time since Q4 2011 – Q1 2012 that the S&P 500 has experienced back-to-back double digit quarterly gains (+11.2% in Q4) and only the 13^th time since 1928 this has occurred. Q4 S&P 500 earnings grew +7.5% y/y. We have emphasized the strong profitability backdrop for large cap companies and positioned accordingly.

Chart 1: Consecutive Quarters of Double-Digit Gains for the S&P 500[1]

The Nasdaq closed +9.11%, while the Dow and Russell 2000 closed +5.62% and +4.8%, respectively. Away from equities, the U.S. dollar rose +2.9%, gold gained +8% after an +11% gain in Q4 and WTI crude prices increased +16% alongside record U.S. oil production.

Economic growth was further supported by job gains (+229,000 in January and +275,000 in February), housing activity is rebounding with single-family housing starts up +35% y/y and ISM manufacturing figures expanded in March for the first time since October 2022.

Chart 2: Strong Jobs Data and Manufacturing Rebound Are Catalysts for Economy[2]

In fixed income markets, 2- and 10-year Treasury yields increased by 37 bps and 32 bps to 4.62% and 4.20%, respectively. The 2s/10s yield curve inversion is now the longest ever, beating the 624-day streak from 1978. That said, we do not believe it is proper to relate previous indicators to the current environment since the last few years have been so unprecedented (discussed in our March 19 Market Note).

At the beginning of 2024, futures markets implied ~150 bps worth of rate cuts in 2024, which fell to ~70 bps at the end of March amid a solid economy and lack of recession fears.

A higher-for-longer interest rate narrative has surfaced given the sustained economic growth experienced in the first quarter. We continue to expect the Fed to be patient, as the economy has proven its ability to absorb these higher rates with low unemployment and above-trend growth.

With inflation down significantly from its peak and consumer confidence rising, profitability expectations continue to expand broadly; markets project earnings to grow +8.6% in 2024. Stocks follow profits.

Ten of Eleven Sectors See Positive Return in Q1

Market broadening was one of the main trends in Q1. The S&P equal-weighted index returned 7.9%, compared to the market-cap weighted 10.6% gain. In March, the equal-weighted index outperformed the market-cap weighted by over 130 bps.[3]

Moreover, the dispersion between growth and value tightened into the end of the first quarter. As of February 9, the spread between the Russell 1000 Growth (RLG) and Russell 1000 Value (RLV) was 8.77%. This difference fell to 3.43% as of the end of Q1, showing the reverse in sentiment and rotation into more value-centric names.

Chart 3: Growth Outperforms Value in Q1, Though Value Has Outperformed Since February 9[4]

Communication services (+15.8%) led the S&P 500, followed by energy (+13.7%), technology (+12.7%), financials (+12.5%) and industrials (+11%). Laggards included consumer discretionary (+5%) and utilities (+4.6%), with the one decliner being real estate (-0.5%).

Cyclical sectors experienced a turnaround this quarter given the positive growth outlook. We have been well positioned for this rotation as we anticipated broadening and cyclical strength.

23 of the 25 Global Industry Classification Standard (GICS) industries closed Q1 in the green, following 24 out of 25 seeing positive performance in Q4. Moreover, 22 of the 25 GICS industries are up in absolute terms over the last two quarters – which has only happened on 10 occasions since 1999.

This breadth is rare and reflects what we have been anticipating. A rise in valuation dispersion across S&P 500 industries is also supportive of active management and seeking opportunities within market inefficiencies.

Q1 Themes and Stories

The Fed’s battle with inflation remains the headline for markets in 2024, thus far. The Fed chose to keep the policy rate unchanged in its March meeting, pointing towards the need for more data to be confident that inflation is lowering to 2%.

The committee maintained their estimate for three 25 bps cuts this year and lowered their estimated number of cuts in 2025 while increasing GDP and terminal rate estimates. Interestingly, the Fed also lowered its expected unemployment rate for 2024 to 4.0% from 4.1%.

Households continue to hold record levels of “cash” on the sidelines, primarily in money market funds to the tune of $6.1 trillion. Last year, money market inflows grew $1 trillion. Risk-on assets have still seen a strong bid with the limited impact that policy rate has had on the consumer and corporate profits.

Q2 brings two more FOMC meetings at the end of April and mid-June, and the chances are growing that we likely don’t see a cut until the fall time frame. Currently, the CME FedWatch tool is projecting a 3% chance for a 25 bps cut in late April and a 61% chance for a 25 bps cut in June.[5]

Outside of the Fed, AI was the most popular conversation in equity markets. Three of the top five biggest winners in the S&P 500 were semiconductors: Super Micro Computers (SMCI) +255%, Nvidia (NVDA) +82% and Micron Technology (MU) +38%.

By 2030, it is estimated that the market for AI will be nearly $2 trillion, up from $200 billion last year.[6] It is important to note that the effects AI will provide are expected to be felt in all corners of the economy, not just semiconductors.

A need for increased energy production, technological advancements and new medical technologies are all examples of second derivatives stemming from broad AI adoption.

Sustained Trend Into Q2

Our outlook remains positive heading into Q2. The economic backdrop shows no sign of a looming recession, as many projected would come last year.

Money supply has grown 40% since February 2020, along with significant fiscal policy spending – both of which make their way into the economy on a lag. A pause in rate hikes, lower inflation and continued fiscal spending combined to create easing financial conditions in Q1.

Q4 GDP was revised upward to 3.4% annualized y/y, well above the previous consensus of 2%. The Atlanta Fed GDPNow tracker is estimating for 2.8% real GDP growth this quarter, up from 2.3% on March 29, following strong ISM data on April 1.

Inflation has peaked and is marching towards the Fed’s 2% goal, with CPI at 3.2% y/y (versus 9.1% y/y peak), core CPI at 3.8% y/y (versus 6.6% y/y peak) and the Fed-preferred core PCE at 2.8% y/y (versus 5.6% y/y peak).

Furthermore, easier policy is on the horizon, and lower costs of capital will bring greater economic growth and expansion to the economy. We are paying attention to housing, onshoring and industrialization themes.

Additionally, the market rally this quarter was much broader than the previous – a very healthy sign in our view. The often referenced “Magnificent 7,” the major theme carrying the market last year, was less apparent this quarter.

Apple (AAPL) and Tesla (TSLA) both fell in Q1, (-11%) and (-30%). Importantly, by Q4 2024, the remaining 493 companies in the S&P 500 are projected to see better earnings growth y/y relative to the Magnificent 7, at 18.1% vs. 15.5%.[7]

With earnings growth broadening, cyclical sectors seeing a rebound and the economy trending upward, we are positioned for companies with under-appreciated growth catalysts, strong leadership and growing end-markets to lead performance in the second quarter.

Click here to read last week’s Weekly Wisdom (3/27).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of April 1, 2024.

[2] Source: FactSet. As of April 2, 2024.

[3] Source: FactSet. As of April 1, 2024.

[4] Source: FactSet. As of April 2, 2024.

[5] Source: CME Group. As of April 2, 2024.

[6] Source: Statista. As of April 1, 2024.

[7] Source: WSJ. As of April 1, 2024.