The first quarter of 2024 was one for the record books.  New record highs were recorded for the Dow, the Nasdaq Composite and the S&P 500.  The Magnificent 7 stocks which led the market up beginning with the October 2022 continued to be the driving force.  Facebook and Meta alone generated a third of the S&P’s return.  But as the market moved into the last weeks of March the glow began to fade.  Two of the Magnificent 7 were kicked out of the club.  Tesla and Apple are both stumbling as they dealt with complications in their relationship with China.  The leader of the Mag 7, Nvidia, also began to back off its sky-high share price as new competition emerged in the AI market.

We began the 1^st quarter with the proclamation from Fed chairman Jerome Powell that there would be 3 interest rate cuts in 2024.  The market translated that to mean there would be 6 rate cuts.  Anticipation that interest rates would be coming down helped fuel the market’s momentum until suddenly it didn’t.  Inflation numbers for the month of March showed inflation to be edging up, not down.  The Fed had set a target of a 2% inflation rate to begin cutting rates.  Inflation is not cooperating, moving closer to 4%.  The inflation drivers are oil and housing. 

When Powell forecast the 3 rates cuts at the Fed November meeting there was some head scratching. Unemployment was not a reported problem and inflation was not at 2%.  So why was the Fed talking about rate cuts?  The reality, the Fed is under a great deal of pressure to reduce rates, quickly. 

Regional banks are in trouble.  You will recall the failure of 4 major US banks in March 2023.  The problems that brought down those banks have gotten worse.  There was a band aid applied to the problem initially.  That band aid has now been ripped off.  The banking system needs an immediate and sizeable interest rate cut.

The federal government is now spending more on debt service than it spends on national defense.  Gimmicks by the treasury department to finance short term government borrowing are running out of funding.  The government needs a reduction in interest rates asap to bring down borrowing costs.  Spending by the government is acting as a drag on the regular economy. 

Small businesses, which account for the majority of US jobs, are being crushed by high interest rates.  Look for more job losses and business failures.

Housing costs are contributing to inflation costs.  The Fed’s run up in interest rates dragged housing mortgages rates along for the ride.  The higher interest rates affect both residential housing and multi-family housing costs.  The higher interest rates also drive up the cost of property insurance.  The housing market needs lower interest rates to get healthy.

The Fed also faces pressure from outside the US to reduce rates.  The $7 trillion spent by the Biden administration has delayed the start of the recession in the US.  But everywhere else the recession or worse is in full stride.  Central banks have coordinated with the Fed on interest rates, but that cooperation appears to have run its course.  Expect central banks to begin lowering their rates ahead of a move by the Fed.  That would put upward pressure on the dollar and have a negative impact on US exports.  Half of the revenue generated by S&P companies comes from exports. 

There are many financial experts predicting the Fed has for the first time in its history engineered a soft landing.  A goldilocks scenario.  Even a platinumlocks economy with no recession.  The Fed is better at creating recessions or worse and I am more inclined to think that is what we will be facing.  The enormous amount of cash handed out by the federal and state governments has kept consumer spending.  The unbelievable federal government debt to GDP is only outdone by consumer debt to GDP.  Consumer debt is at an all-time high.  60% of families are living paycheck to paycheck.  Credit card delinquencies are at a record high.

The Labor Department continues to report surprise to the upside employment numbers.  A look behind the curtain shows an employment reality that is becoming a real problem.

There has not been a net new full-time job created in the US since February 2023.  Part-time jobs are being created as working hours are being cut back.  Government hiring is at the top of the monthly employment reports (a recession indicator).  Non-US born workers (hospitality and construction) are the biggest beneficiaries of new hiring.  BTW, the employment numbers reported by the Labor Department over the past year have been revised down by 40%, raising real concerns about the veracity of the reporting.

The Federal Reserve focuses on old (lagging) indicators to determine its next move.  Leading indicators are all pointing to a recession.  A near 100% predictor of recession is the inverted yield curve, when short-term borrowing rates are higher than long term rates.  The yield curve has been inverted since the fall of 2022. 

The global economy is in trouble.  Recessions across Europe and Asia are picking up speed.  The global money supply is at recession levels as global trading falls off.  Trade wars are developing between China and every other country.  China, the world’s 2^nd largest economy appears to be in full deflation mode.  Global hot spots are getting hotter.  The South China Sea has the potential to turn into a shooting war which the US is obligated to join. 

Making money in the stock market was easy in the 1^st quarter.  As we moved into the 2^nd quarter the situation has changed in the wrong way.  Fear that there will not be a rate cut is dragging down the equity market. 

The Oak Springs portfolio remains overweight in energy/oil, commodities/gold/silver, long duration US government bonds and dividend paying stocks.  We remain underweight in equities as I expect the market slide that began late in the 1^st quarter to continue.

Your trust is greatly appreciated.  If you have questions or wish to schedule an appointment, please feel free to contact me at (865) 368-1917.