First Quarter 2024 Review

The equity rally continued this quarter with signs of a broadening of participation as the quarter ended. The S & P 500® was up 10.4% during the quarter, the MSCI All-Country World Index® returned 8.2% while the Bloomberg Global Aggregate Bond Index fell by -0.8% as global interest rates modestly increased. US Mega Cap Growth stocks continued to lead – increasing by 10.6% but were joined by Mid Cap stocks which also rose nearly 10%. International Developed (+6%) and Emerging Markets (+2%) were positive but lagged the US. Domestic Short-term Bonds (+0.3%) and Long-term Bonds (-3.7%) showed significant divergence as longer maturity bonds reacted to a change in interest rate expectations among investors driven by somewhat hotter inflation numbers and a reset in the market’s expectations for the number of US interest rate cuts in 2024 by the Fed from seven to three. Despite all the hype associated with Artificial Intelligence (AI), Technology stocks (+8%) lagged Energy stocks (+14%), Industrials (+11%) and Financials (+12%). The lone negative sector this quarter was REITs (-1%) as worries regarding excess office space across the US weighed on sentiment. Precious metals were up, Gold hit an all-time high (+8%) while the broad Commodities indices were up 3-4%. The Global 60/40 portfolio returned 4% for the quarter. All of our risk model portfolios performed in-line with their weighted benchmarks for the quarter.

Revenge of the Real Economy

In several of our previous letters, we’ve discussed the dual mandate of the Federal Reserve – which is to maximize employment and ensure price stability. There are times when these two mandates can come into conflict — 2022 through most of 2023, comes to mind when the Federal Reserve emphasized bringing inflation down at the risk of slowing the economy and increasing unemployment. Chairman Powell alluded to “pain” in August of 2022 – which is the Fed’s euphemism for unemployment as necessary to bring the rate of inflation back down to the Fed’s target of 2.0%. With that as a backdrop, it is hard for stocks to do well (2022) and investors tend to hide in stocks that they feel are immune to an economic slowdown (Mega Cap Growth in 2023). Yet that dual mandate came back into balance in December of 2023 and then shifted again in March of 2024, to prioritizing economic growth over price stability (inflation). In other words, the “Fed Put” is back. The Fed Put is a Wall Street term that refers to the belief that the U.S. Federal Reserve (the Fed) will intervene during crises to support the economy and financial markets. The term comes from the “put option,” which is a contract that allows the holder to sell an asset at a set price within a specified timeframe – in other words, an insurance policy.

In an environment where the Federal Reserve is willing to protect the economy/employment over fighting inflation – investors historically react by increasing their risk tolerance and moving into assets that are more economically sensitive. This tendency was very much on display in late March as stocks outperformed bonds, small cap stocks (Russell 2000, +5%) outperformed Mega Cap Growth (+1%), energy and basic materials stocks were the best performing sectors and gold hit an all-time high.

But for us, the $64,000 question is “Why Now”? There isn’t anything in the aggregate economic demand statistics to give the Fed concern. Below is a summary of the statistics we monitor on this front:

Source: St. Louis Federal Reserve


The current estimate for Real GDP growth from the Atlanta Fed in the first quarter of 2024 is 2.8% as of this writing, certainly in line with recent results. If anything, the US is enjoying somewhat of an economic productivity renaissance much like the mid 1960’s, mid 1980’s and late 1990’s:

Source: St. Louis Federal Reserve

On the inflation front, there’s no question that progress has stalled with investors now describing the Fed’s change in tolerance as targeting “two point something” instead of 2.0%. That is similarly evident in the numbers we track:

Source: St. Louis Federal Reserve

Even looking at the Fed’s preferred measure of Personal Consumption Expenditures (PCE) ex-Food & Energy, 2.8% year over year is closer to 3.0% than 2.0%. Yet, despite having gone through a 30% rise in the general price level over the last four years – forward inflation expectations remain “well anchored” to use the Fed’s phrasing, in the mid two percent range, looking out over the next 10 years:

Source: United States Treasury

So that leaves the labor market as the impetus for the Fed’s renewed emphasis on economic growth. The Fed is attempting to come to grips with something this country has not faced in over 50 years – labor demand exceeding labor supply:

Source: Bank Credit Analyst

This situation was born during the pandemic and although most of the damage has since been repaired, the US economy remains short about 3+ million workers, most of whom took early retirement:

Source: Bank Credit Analyst

Given the strength of the residential real estate and stock markets over the last couple of years, it is highly unlikely that those early retirees will need to return to the workforce in any meaningful numbers. So, the Fed is faced with two choices on how to remedy this situation:

Source: Bank Credit Analyst

The chart on the left depicts the Fed maintaining the economy’s growth around its current level to allow time for demographics and immigration to “fix” the labor shortage problem brought about by the post-pandemic early retirements. The chart on the right is the less desirable solution and the one the Fed was alluding to during the Summer of 2022 – one where a weakening of the economy (aka, a recession) reduced the aggregate demand for workers which would bring labor supply and demand back into balance. The switch in tone out of the Federal Reserve late in 2023, and again after the March 2024 meeting was an explicit acknowledgement that the Fed is now targeting the left chart as the solution.

The bottom line is that, over time, when the Fed is supportive of the economy with liquidity, both the stock and bond markets do well, with a clear bias towards stocks as the level of liquidity support increases. In the chart below, we’ve used the level of unemployment as a proxy for the amount of liquidity support the Fed needed to add to the economy to support economic growth and combat unemployment:

Source: Ibbotson Associates, St. Louis Federal Reserve

Looking at the bars from left to right, this is the “Fed Put” in action – supporting employment and economic activity with liquidity and how that added liquidity impacted both stock and bond markets. Your portfolios are very well positioned to benefit from the above. As the saying goes, “Don’t Fight the Fed.

We at Twelve Points Wealth hope you and your families are well. Please call or email if you have any questions.





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