Q1 End Report

Author:  Joe Maas, CIO SPG Advisors LLC

Wednesday, April 10th, 2024

Economic Cycle Update

Welcome to our Economic Cycle Assessment, our quarterly analysis of the market’s performance and our strategic outlook, based on the primary drivers of the market – interest rates, inflation, the Federal Reserve, corporate earnings, and geopolitical events. 

Every quarter, our team analyzes a list of qualitative and quantitative factors of the economy, as we assess what part of the cycle, we find ourselves in. This process allows us to adopt longer-term views on the economy and markets, which ultimately inform our portfolio positioning. 

As of the end of Q1 2024, we have observed 35 bullish factors in the economic cycle and 14 bearish factors, resulting in a bullish score of 71.4% and a bearish score of 28.6%. Regarding our position within the economic cycle, we believe we may be near a midpoint, indicating potential for further economic growth while also acknowledging the possibility of a downturn ahead.

Even though our assessment revealed a bullish score, our optimism is tempered by a cautious outlook. The unconventional nature of the current economic cycle, characterized by unique monetary policy and lingering fiscal stimulus from the pandemic presents difficulties in assessing the state of economic cycle, as these artificial economic adjustments have never been used in the manner and magnitude that they were in recent years.

For instance, the M2 money supply, a measure of the US dollars in circulation, rose 28.9% from February of 2020 to the peak of the money supply in April of 2022. This was the most intense injection of newly printed money in the history of the US, so it’s plausible that some uncertainty remains following this unusual era of monetary policy and fiscal stimulus.

On one hand, our optimism is fueled by consistently robust labor market indicators and GDP growth data. Job market statistics reveal low unemployment rates and substantial nonfarm payroll gains. Fourth-quarter GDP growth for 2023 was revised upward to 3.4% and professional forecasters, alongside the Federal Reserve, have revised economic projections for 2024 and 2025 up as well.

On the other hand, caution is warranted due to persistent inflation and potential lagging impacts of quantitative tightening. March’s annual CPI inflation rate rose to 3.5%, remaining above the Federal Reserve’s 2% target. There is a real risk of the Fed cutting interest rates prematurely or too late, potentially exacerbating inflationary pressures or marking the start of an economic pullback.

Below is a brief overview of some of our leading indicators for both the Bulls and the Bears:

DP Growth

Annual Q4 real GDP growth was recently revised upward to 3.4%. In a time where many thought we would be in a recession by now, this strong of economic growth has been a positive surprise to the economy.

Buyers vs. Sellers

Heightened demand from buyers coupled with a scarcity of sellers, alongside substantial cash on the sidelines poised to possibly enter the market, bode well for likelihood of continued market momentum.

Corporate Earnings

Throughout the first quarter, earnings across the S&P 500 largely came out better than expected for calendar year 2023. Stocks have continued to perform well, backed by better than expected earnings in most sectors. Analysts have overall positive views on earnings for the first quarter of 2024 as well. 

Prolonged Positive Momentum

Multiple all-time highs in stock markets notched during the quarter, accompanied by a broadening participation across more sectors and market caps, illustrate the strong positive momentum stocks have been demonstrating since October of 2023. 

Stocks Priced to Perfection

Stocks appear to be priced to perfection, anticipating a scenario where inflation eases and the Federal Reserve implements 2-3 rate cuts of 25 basis points by the end of the year. Any deviations from these expectations could trigger significant volatility in the short and medium terms. Moreover, there’s a possibility of a longer-term shift towards a Federal Reserve policy that maintains natural rates higher than the near-zero levels of the past decade. These factors pose risks to where we stand in the economic cycle.

Manufacturing Sector 

While the ISM Manufacturing index showed a positive turn for the first time in over a year in March, the broader US manufacturing sector remains below its usual trend of growth. Other sources of data like US industrial production data paints this lackluster picture of manufacturing vibrance.

Lending Conditions

With the failure of multiple large regional banks last year, many banks have been more conservative in their lending. This trend not only reflects a level of uncertainty in the banking sector, but also limits near term economic growth as capital is less available for firms to grow.

1 Year % Change in Unemployment 

While March’s unemployment rate sits at just 3.8%, the 1-year percentage change in unemployment has been steadily rising since early 2021. This trend may partly reflect the labor market’s adjustment post-pandemic, but it also could be a precursor to a bumpy economy ahead.

Summary

In the first quarter of 2024, the stock market surged, fueled by companies surpassing earnings expectations, better than expected economic conditions, and positive momentum, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all posting significant gains while bonds remained relatively stagnant. Growth stocks continued to outperform value stocks, and Real Estate was the only S&P 500 sector to end the quarter in the red. Inflation persisted throughout the quarter, posing challenges to achieving the desired 2% target, while Treasury yields rose across the yield curve, reflecting market adjustments to Federal Reserve expectations.

Economic forecasts were revised upwards, indicating continued strength and resilience in the US economy, but signs of an imminent rate cut from the Federal Reserve remained elusive, prompting ongoing speculation. Market concentration reached historic levels, yet strong fundamentals persisted, particularly among mega-cap companies, as worries over an AI bubble remain. Meanwhile, generational differences in economic perceptions shed light on market dynamics, emphasizing the importance of monitoring demographic trends and geopolitical events for assessing economic and market conditions.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

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