As we continue to do on an occasional basis for our Napier Financial newsletter readers, we’re sharing some brief high-level perspectives from our investment team’s vantage point on what’s recently taken place in markets and our investment outlook ahead.
Since last January’s investment update, stock markets have pretty much gone nowhere but north. The reasons are of course aplenty, but primarily it’s been optimism about:
- the possibility for the large productivity benefits that Aritficial Intelligence (AI) could deliver to the economy
- the potential for Federal Reserve interest rate cuts later this year based on cooling inflation trends
- improving earnings forecasts, particularly AI-related
- a surprisingly robust economy
At the time of this writing, the S&P 500 has risen five months in a row. It’s up somewhere in the vicinity of 10% year to date, up 27% since the October 2023 lows, and up nearly 50% since the October 2022 lows. Impressively, this market has risen in the face of a series of hotter-than-expected inflation reports in both February and March, along with the “Magnificent 7” being whittled down to the “fabulous 5” or some such moniker now that Apple and Tesla have been having difficulties. This says a lot about the character of this bull market. Additionally, over the past month or so, this rally has finally starting to broaden participation to more than a handful of stocks and sectors, something we’ve been looking for and are welcoming.
We still like this market, particularly over the longer term. We still believe this bull market still has further to run. However, while it seems like this current uptrend will never end, we believe a near-term pause or pullback in prices may be warranted. We say this for several reasons, but likely the two most important are inflation and the Fed. Markets began this leg of the rally late last year, optimistically believing the Fed would cut rates in 2024 as many as 6 times, based on anticipated slowing economic growth and inflation progress. (It should be noted the Fed had since indicated only 3 possible cuts). While we think it’s wonderful that the economy continues to surprisingly chug along, it also complicates the Federal Reserve’s job of reducing inflation down to their 2% mandate. Depending on how things play out, if the inflation data continues to remain elevated (as it has over the past couple of months), and the Fed is reluctant to lower rates on concerns of stoking further inflation, this could lead to markets becoming impatient and create some headwinds until more clarity emerges.
Other reasons that could weigh on stocks include:
- fairly full valuations
- increasing government borrowing needs
- a more than likely contentious upcoming election
- geopolitical issues also cannot be discounted
As always, we continue to monitor the macroeconomic landscape and if it makes sense, adjust your portfolios as needed.
If you have any additional questions or wish to discuss our investment outlook further, please contact my colleague Nick Berlen to schedule a meeting with a member of Napier Financial Team.
(781) 884-2355.
