Our Thoughts on FIRST Quarter 2024
Matt Johnson, CFA® - Andy Nugent, CFA®
1st Quarter Market Recap, Portfolio Analysis, and Review
What a way to begin the year! The S&P 500 is already up over 10%. The mega cap tech stocks continue to move higher, and many other sectors have joined in as well. That is back-to-back quarters that the S&P 500 has experienced double-digit growth.
With everything going on in the world, the market is primarily focused on inflation, interest rates and job reports. We continue to monitor these areas as there is an expectation of multiple rate cuts this year. Let’s take a closer look at what happened (or didn’t happen) over the past few months.
The Consumer Price Index (CPI) and Personal Consumption Expenditures index (PCE) are widely used to determine the inflation rate. Last quarter we had mixed results as the CPI increased a bit and the PCE continued to decline. The jobs market has been strongly supported by continued fiscal spending from Washington. Inflation is way off its peak in the middle of 2022 and getting closer to the Feds goal of 2%, but is it stalling out? We need more data and will keep an eye on these numbers over the next few months.
Interest Rates
The Fed has been very consistent with their message. They will not lower rates until they are confident inflation will reach their goal. It doesn’t have to be at 2% for rate cuts to begin, but they want to see months of data where they can be confident it will get there. With the inflation indexes mixed, the Fed held rates steady last quarter. The Fed Fund rate remains between 5.25% - 5.50%. Pundits were hoping for a rate cut in March, but it looks like any cuts will be pushed to June or later this year. Others believe the interest rates will be higher for longer. This pushed the yield on the 10-year note up to 4.2% from 3.9% last quarter.
The yield curve remains inverted. This means that short-term bills are paying higher interest rates than long-term bonds. The spread between the 1-month T-Bill and the 10-year note is narrowing with the rise in the 10-year yield. This supports the higher for longer narrative.
Money market funds are still paying more than 5% which is a very nice return on a cash investment. We are using money market funds for our bond proxy since the yields are comparable and investors maintain liquidity by not having money tied up for an extended time.
Home mortgage rates remained steady ending the quarter at just under 7% for a 30-year fixed rate mortgage, per Bankrate.
Sector Analysis
While the mega-cap tech stocks continued to deliver upside, we witnessed appreciation in several sectors including Communication Services, Energy, Financials, and Industrials. Only Real Estate was lower. In fact, looking at the chart above, almost every sector is at or near the 52-week high. It a little concerning but earning are growing too.
We did quite a bit of trading in the quarter. We added a few quality names and sold positions that reached our sell price and some that we didn’t see turning around any time soon.
Industrials – We added to our exposure in defense names purchasing Lockheed Martin and Northrop Grumman. We upgraded the quality of our holdings by selling the lawsuit riddled 3M and adding Honeywell. We sold out of our position in the railroad and freight transporter Union Pacific as the stock price reached our estimate of its true worth. We then added Air Products. A consistent earnings and dividend grower trading at reasonable multiples. Finally, we added to our existing position in United Parcel Service (UPS) on a price pull back.
Financials – We do not hold a large weighting in Financials, and we hold even less after last quarter. We pared back Visa as its price appreciated and neared our sell target. We felt it prudent to sell about half of our holdings.
We exited two small positions in Chinese stocks, Alibaba and Tencent. The Chinese government is making it extremely difficult for these companies to maximize profits. After being patient for some time, we decided to move on from these names.
Summary
2024 is starting out great. The expectation of lower inflation and interest rates has helped give investors optimism. The Fed did nothing in the quarter as inflation signals were mixed. It didn’t seem to faze the market. It will be interesting to see what happens in the next few months. If the market pulls back a bit, that is fine. It has had a big move and may need a breather. In the meantime, we are happy with performance, we have increased portfolio quality through investing in quality companies with growing revenue and solid cash flows. We remain committed to the process and take a long-term view. We again thank you for your continued support in allowing us to help you to reach your financial goals.
Matt Johnson, CFA® - Andy Nugent, CFA®
Sage Capital Advisors, LLC is a Securities and Exchange Registered Investment Advisor. Sage Capital Advisors is headquartered in Sioux Falls, South Dakota. Advisory services are only offered to clients or prospective clients where representatives of Sage Capital Advisors are properly licensed or exempt from licensure. This market commentary is solely for informational purposes and should not be construed as investment advice, it is only intended to provide education about the financial industry. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of investment management fees, or the impact of taxes, all of which would have the effect of decreasing historical performance results. Indices are unmanaged and cannot be invested in directly. It should not be assumed that your account holdings correspond directly to any comparative indices. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place.
