Recap | Week Ahead | Challenges

“Don’t mistake possibilities for probabilities.  Anything is possible.  It’s the probabilities that matter.  Everything must be weighed in terms of its likelihood and prioritized.”  - Ray Dalio, Chief Investment Officer of Bridgewater Associates (world’s largest hedge fund)

Last week's market recap: 

• The S&P 500 closed the week down -1.52%.  Year-to-date the index is up 7.86%
• NASDAQ closed the week down -.45%.  YTD the index is up 7.97%
• U.S. Aggregate Bond index was down -.70%.  YTD the index is down -2.52%
• 10-Year Treasury Rate increased, ending the week at 4.50% up from 4.39% the prior week
  • Fed Funds Target rate remains at 5.25-5.50%
• The 1-Year Treasury is yielding 5.17%  
• A 6 Month Treasury is yielding 5.37%  
  • Short term rates are trending lower.  Reinvestment Risk for short term debt remains elevated.

The week ahead:  

• Retail sales
• Housing Starts
• Earnings: Goldman Sachs, Morgan Stanley, Netflix, United Airlines
• Increased focus on Israel and Iran

Challenges and Opportunities Ahead:

Despite a strong Q1, there are still many challenges ahead… 

• Middle East Tensions:  Israel’s reaction to Iran will be the main driver of short term volatility.  The markets don’t want to see a broader war. We hate framing this with a financial perspective given the seriousness of the situation and the lives on the line, but this is part of our job. 

• CPI came in hotter than expected.  Inflation continues to linger.   

• Core Services inflation remains sticky.    

• Depressed valuations in commercial real estate could be problematic for many regional banks.

• Stretched P/E ratios for many mega-cap companies suggest prices are historically high. 

• And we have a dysfunctional Presidential election on the horizon. 

Key observations:

Economy:  

The broad U.S. economic data remains resilient. Unemployment remains low.  There are signs of strength especially within manufacturing. GDP growth seems to be slowing.  We are looking for signs of inflation stickiness. 

The Fed:  

We expect moderating cut expectations.  1-2 cuts in 2024 may prove bullish in the current growth environment.

Fixed Income:  

Although the bond market remains slightly negative this year, bonds should perform better if interest rates move lower later this year.  Now that the ZIRP (zero interest rate policy) era is behind us, fixed income should help provide diversification, capital preservation, and potential tax exemptions. The “flight to safety” trade due to increased geopolitical tensions and/or a deterioration in economic data could be sources for lower yields (higher bond prices).  

Equities:   

We are seeing broader sector leadership.  All time highs usually happen because things are going well.  Earnings have been growing and confidence building.  We expect higher volatility in Q2 compared to Q1, but that’s not saying much as we’ve been in an ultra-low volatility rally since mid-October 2023 (especially now with increased Middle East tensions).  If inflation remains sticky, energy and commodities may provide a hedge.  If conditions deteriorate, we wouldn’t be surprised to see a rotation back into mega-cap tech as a “flight to safety.”  Cash and Money market positions across the industry are large.  This means we could see money from the sidelines invested during dips.  Volatility should be used as an entry point to add quality assets.

Most investors should not pause or change their long-term investment strategy, but always consider geopolitics, corporate earnings, valuations, and other metrics when making investment decisions.

Source: BlackRock Student of the Market

As always, let us know if you have any questions.

Best, 

CRA Investment Committee

Matt Reynolds CPA, CFP®

Tom Reynolds, CPA 

Robert T. Martin, CFA, CFP®

Gordon Shearer Jr., CFP® 

Jeff Hilliard, CFP®, CRPC®

Joe McCaffrey, CFP® 

Phillip Tompkins, CFP®

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