The financial markets have enjoyed a solid start to the year, with the S&P 500 index setting several new highs while basking in a five-month long winning streak. The resilience of the stock market has been remarkable as investors have been wary of external pressures, such as rising geopolitical tensions, elevated interest rates, and stubborn inflation. Fixed income investors, on the other hand, were dealt modest declines in the quarter as better than expected GDP reports, coupled with improved expectations for growth in the economy, predictably translated into a retreat in bond prices.
The U.S. economy has continued to prove resilient this year during a time when many economists had considered a broad recession imminent. Recent job reports have shown strong hiring in the private sector, with the nation adding 303,000 jobs in March – well above the consensus forecast of around 200,000 new hires. On the inflation front, expectations for price increases in 2024 and 2025 have settled at a tolerable level of around 2.5%. Putting it all in perspective, the U.S. economy appears to be better balanced postpandemic, with shipping bottlenecks mostly resolved and with labor force participation trending higher.
Much of the credit for the strong economy and healthy financial markets can be attributed to the Federal Reserve who has successfully delivered on its dual mandate of price stability and maximum employment on behalf of the U.S. economy. Consequently, positive economic trends have emerged, such as a recovering U.S. manufacturing sector that has rebounded after sixteen straight months of contraction.
As it relates to the stock market, strength continues to be provided by a select group of large service companies in the technology sector. According to recent research from the Boston Consulting Group, 85% of corporate executives are planning more spending around Artificial Intelligence (AI) and Generative AI in 2024, making this an exciting time to be an investor in technology companies. As corporations prepare their upcoming quarterly reports, investors will be assessing whether these investments in technology and innovation are translating into profitable business results. Also important to upcoming stock market performance will be the approximately sixty national elections scheduled for this year, with the political results expected to have far-reaching consequences.
In closing, there will be on-going market risks for investors to contend with, such as the recent jump in commodity prices as a good example of potential threats to market confidence. Of late, the Federal Reserve’s effort to reach their targeted inflation rate of 2% has been a daunting challenge. Knowing that higher oil prices can permeate supply chains quickly and have inflationary consequences, these elevated energy costs will keep policy makers on edge. In the face of rising commodity prices, central bankers could find themselves with few options, in turn fighting inflation via tighter monetary policy which economists fear will increase the chances of recession.
