Perspectives
Quarterly Market Newsletter
Since the beginning of November last year, our stock market has been on a tear. Suddenly, it became obvious to most investors that inflation was coming down and our economy was not going into recession. Therefore, how one invested could take a turn toward companies that would benefit from continued economic expansion. Many companies that investors were avoiding became attractive and were bought.
The first quarter results have been terrific and broad (see the Major Indices section of this letter). Many other stock markets around the world have also been rising. GDP estimates for the U.S. have been increasing. To a large degree, the higher stock market reflects this reality; more growth, increasing profits, and higher stock prices.
Since the pandemic low on March 23rd, 2020, our stock market has increased 25 percent per year. What an opportunity that was. Lows usually are! “The end of the world will only happen once, and then nothing will matter anyway!”
Bonds have had a different path. Interest rates finally began rising. After a decade of near-zero rates, it has been long past due that rates reflect the true costs of capital. These include risk factors, inflation, and alternative uses.
Unfortunately, during the low-rate times, some borrowed capital was poorly allocated, since it was so cheap. Now, the consequences of those poor decisions are coming home. One example is that some banks bought bonds at such low rates that they are now worth considerably less than their purchase price. This has affected the solvency of a few. Others may have problems too.
So far, the failures have been contained without affecting the broad economy. However, the lesson that one can lose money in bonds was presented again. Over the past two years, bonds have produced negative returns. This year, the bonds aggregate index is also negative. See what we have to say about future bond returns in our Forecast section.
Forecast
Economy
Finally, Wall Street gave up on waiting for a recession. Pundits, economists, and other so-called experts admitted that the U.S. economy was strong and likely to stay that way. This has been the view of Riverplace Capital all along. GDP forecasts for 2024 have risen from 0.6 percent to over 2 percent now. We would not be surprised to see even greater economic growth. Remember, three big government programs, (the Chips Act, the Infrastructure Bill, and the Inflation Reduction Act), are all finally spending on their mandates. These expenditures will accelerate throughout 2024.
A new technology, Artificial Intelligence (AI), is rapidly being deployed by many businesses. This offers the promise of enhanced productivity and profitability. It will also produce many new services and use cases. In short, AI will change our world just as radically as the computer and the Internet did. It will certainly accelerate growth in our economy.
So, no recession, good growth, and broad participation. What’s not to like?
Equities
The Federal Reserve will probably begin lowering short-term interest rates soon. This will affect interest rates on all manner of instruments out to about five years in duration. Most of the impact will be on the very short-term maturities up to about two years. Longer-term rates may not be affected at all.
Longer-term rates are mostly influenced by inflation. If we are correct and inflation continues to be sticky around three percent, then the present level of those interest rates is a fair price. If inflation does continue to come down to two percent, then longer-term rates can decline as well.
Fixed Income
The Federal Reserve will probably begin lowering short-term interest rates soon. This will affect interest rates on all manner of instruments out to about five years in duration. Most of the impact will be on the very short-term maturities up to about two years. Longer-term rates may not be affected at all.
Longer-term rates are mostly influenced by inflation. If we are correct and inflation continues to be sticky around three percent, then the present level of those interest rates is a fair price. If inflation does continue to come down to two percent, then longer-term rates can decline as well.
Quality continues to matter. After the long period when interest rates were extremely low, there are potentially many bonds that were issued for reasons that are no longer viable. The little increase in rates for lower-quality obligations is not worth the risk.
Investment Strategy
Equities
One of the best ways to make money in the stock market is to get in front of an important trend and ride the growth. AI is trending now. The rollout of this new technology will impact many sectors. However, from an investor’s point of view, it is more important to get in front of where the money is being spent to implement the uses.
Think not only about the obvious processing assets but everything in between those and the final user. In addition, maintaining all this new infrastructure will also have a growth wind behind it. It runs from all the communication equipment to something as mundane as specialized cooling systems for server facilities. We have added several issues that benefit from AI adoption. So far, results have been excellent.
In the fall of last year, Riverplace Capital recommended that investors should cast a wider net for selections. This is exactly what we have done and are getting good performance from a wide variety of stocks. As usual, we continuously monitor each holding and replace as necessary.
Fixed Income
Wealth Management
Talk With Us
A new industrial revolution is playing out before our eyes. Just as the Internet before it, AI will touch just about everything in our lives. Aspects of this technology will be integrated into to more and more products and services. It already is in many we use every day. Word processing software now can anticipate the next word you are about to type more and more accurately. Have you ever been directed to converse with an automated response system to resolve a problem? These and more are just obvious applications of this new technology.
AI is quickly evolving, becoming more and more capable. The first uses have been specific, but in time it will become more and more versatile. Just as a human is broadly capable, so will new versions of this technology. Don’t be surprised to see robots with greater agility, and enhanced abilities to serve in a variety of service roles. Some Japanese firms are leading the way here and are making rapid progress.
Computer programmers, architects, lawyers, and medical technicians are already using systems that aid and enhance their abilities and output. This is just the beginning. If this seems like an incredible pace of change, you are correct. It will probably accelerate.
All the ramifications on our lives because of AI cannot be fathomed. As investors, we must be aware of the power of this change and try to support it and benefit from it with our capital, both monetary and intellectual. How we at Riverplace Capital work, invest and serve you will be affected by AI. One thing we will never change is the high-touch personal service we provide.
The promise of this technology is greater efficiency, productivity, and accuracy in almost all phases of our lives. Of course, there are risks and hazards to navigate. Just like any technology, it can be used for both good and bad. Nevertheless, it is upon us. We want to reap its positives and ride its value creation for you.
as of 3/31/2024
29.7%
Dow Jones Industrial Average
21.1%
Mid Cap Stocks (S&P 400)
23.4%
NASDAQ Composite
36.3%
Small Cap Stocks (Russell 2000)
20.1%
MSCI EAFE
-0.4%
Bloomberg Aggregated Bond Index
29.7%
Inflation
3.2%
- Art Cashin
