Portfolio Strategy Review Q1 2024

by | Apr 16, 2024 | Portfolio Strategy

Overview

In the first quarter, market growth continued to broaden across all sectors except real estate. However, since early April inflation concerns, and geopolitical uncertainty have moved to the forefront. Markets are on alert.

As Jamie Dimon, CEO of JP Morgan noted in his recent letter to shareholders, “global wars come to our shores whether we like it or not.” History is full of examples where external forces had unforeseen economic, financial, and military repercussions.

Present day reminders: The threat of the Israeli-Hamas conflict escalating into a broader regional war could distort oil prices; the Russia-Ukraine war is likewise distorting food and energy prices; China trade tensions, its aggression in the South China sea, and its ongoing threat to attack Taiwan all pose risks that could threaten many industries, disrupt global trade routes, and impair high-end capacity in the semiconductor industry.

Countries continue to assess their alliances and how they are impacting national security, trade, investment, and overall interests. The complexity of these factors presents geopolitical uncertainty and risks to financial markets that are often hard to calculate.

Economies and Recessions

The Eurozone is weak. Manufacturing in Germany struggled, and the UK may be in recession with large employers announcing mass layoffs. Inflation is sticky. Labor is protesting because wages aren’t keeping pace with rising living costs. China showed some improvement but is still facing headwinds. Its population is in decline; the world wants to be less dependent on its manufactured goods; supply chains and alliances are adapting to these realities. President Xi Jinping has consolidated power and runs an authoritarian state. Political and business leaders who disagree with his ideology end up missing or jailed on corruption charges. It isn’t clear if he cares about fixing the economy.

In the US, the aggregate economy has remained resilient and has avoided recession, though some analysts contend we have experienced “rolling recessions” where different sectors of the economy have dipped into and out of recession. The consensus view is that the job market is no longer frothy, but still is in good shape. Recent inflation readings have been higher than forecast.

Interest Rates and Inflation

In the US, the Wall Street forecasts on interest rates in 2024 went from seven rate cuts to four, to maybe three, even as the data (strong employment and sticky inflation) suggested otherwise. The inflation report on April 10 was higher than expected and long-term rates jumped. The stock market fell. Many economists think rate cuts are not necessary because the economy has remained strong and lower rates would only push inflation higher. Some even think we may need rate increases if inflation doesn’t settle down soon.

Corporate Profits

While the direction and magnitude of inflation and interest rates can impact market prices, corporate profits are a more important determinant of stock performance.

Banks are a good barometer for economic activity. They kicked off this quarter’s earnings season. As of this writing these banks have reported the following results:

Bank of America: lower than expected
JP Morgan: lower than expected
Citigroup: better than expected
Schwab: better than expected
Goldman Sachs: better than expected
Morgan Stanley: better than expected

Reason for Optimism

Global economic forecasts were revised upward, and inflation is expected to decline (absent a greater escalation of war). The market continued to broaden across sectors. Ten of eleven sectors turned positive on the year. Investments being made in supply chains and advanced technologies are healthy for the long term resilience of the economy. The US is in better shape than other developed nations, though our fiscal and deficit issues need to be addressed. However, in an election year, this do-nothing Congress appears more interested in headlines and clicks on Twitter than governing.

It’s easy to get rattled by short-term declines with all the hyper-adjective riddled headlines. The political dysfunction, one would hope, will correct itself! Although hope is a dangerous word for it deceives more than cunning and vice. But let’s be hopeful anyway.

 

Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com.

PLEASE NOTE: You can’t invest directly in an index. Past performance does not guarantee future performance. All investments are subject to risk, including possible loss of the money you invest. Diversification does not guarantee profit or protect against a loss. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.

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