This year started with another leg up in an ongoing stock market rally, led primarily by large-cap U.S. tech stocks, including Nvidia, Meta, Netflix, Amazon, and Microsoft. The increases build on what was reported by the Federal Reserve as a $5 trillion addition to household net worth in the fourth quarter of 2023 as the stock market rebounded. Since the fourth quarter of 2019, before the onset of the pandemic, household net worth is up $39.3 trillion, a gain characterized by Bank of America economists in a research note as “staggering” (via Barron’s magazine, 3/11/2024 ”Up and Down Wall Street”).
The continued growth in the financial markets is likely having a significant impact on consumer confidence and spending, which in turn could cause inflation to persist, although the financial markets are still pricing in about a 75 percent probability of an interest rate cut at the June Federal Reserve meeting as well as investor expectations of further interest rate cuts in September and December.
Such expectations represent the biggest near-term risk in the financial markets. Stock prices, and along with them valuations, have increased to where we are paying considerably more for profits today than as recently as September 2023. If expectations materialize, the continued low volatility/positive market environment should continue. If declines in inflation and subsequent rates are delayed, the downside would likely include increased market volatility. While Fed Chairman Jerome Powell has reiterated that the federal funds rate is likely at its peak and rate cuts are likely this year, the near-term market movements will reflect the timing of any such changes.
The financial markets are benefitting from two large longer-term tailwinds. One is the expected lower interest rates, as noted above. Historically, asset prices rise as interest rates decline. Second is the record amount of uninvested cash being held in money market funds. Longer term, as interest rates move downward, we would expect this accumulated cash to be invested into longer-term “risk” assets, the public and private markets.
Current bond/fixed income yields remain attractive as well, especially compared to the lower interest-rate environments of 2019 through 2021. Bond assets can provide lower volatility and greater income than money market funds, albeit less potential growth than equities.
Even amid positive tailwinds, we want to maintain a diversified approach. Rebalancing your portfolio in this environment remains a key investment strategy, particularly when a household is closing in on retirement and will be withdrawing savings—or is already withdrawing funds—to support their desired retirement lifestyles.
IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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