In reflecting on the current market climate, we are reminded of the timeless adage, "All Things Come to Those Who Wait,” famously penned by Lady Mary Montgomery Currie in 1892. As we navigate the complexities of today's financial landscape, these words resonate with renewed significance, underscoring the importance of patience and perseverance when investing.

The past year has been a testament to the enduring resilience of the market despite lingering uncertainties surrounding the Federal Reserve's rate hike program and inflationary pressures. We witnessed a remarkable return of 24% as measured by the S&P 500® in 2023, followed by another promising start to the first quarter of 2024 with over 10% growth, rewarding patient investors. This performance underscores the market's ability to weather challenges and adapt to evolving economic dynamics.

While inflationary concerns persist, recent data indicates a gradual decline from its 9.1% peak in 2022, albeit with stubborn pockets of resistance in certain sectors such as housing and services. The Federal Reserve's cautious approach reflects a commitment to ensuring a stable economic trajectory, with careful consideration given to the impact of inflation on consumer spending and overall market stability.

Amidst these developments, we've observed a shift in market sentiment, with renewed confidence in both secular growth opportunities driven by technological advancements and a broader embrace of cyclical sectors. Notably, labor costs, a key driver of post-COVID inflation, have shown signs of moderation, accompanied by a notable rise in labor productivity—a trend bolstered by ongoing technological innovations.

These advancements may be a key contributor to containing inflation as we advance, as automation and artificial intelligence could reduce the need for labor and drive further gains in productivity, helping to overcome wage pressures that would typically occur with low unemployment. We note that productivity increased significantly from the mid-1990s into the early 2000s as substantial technology investments were made due to the commercialization of the Internet. We believe that advancements in artificial intelligence, robotics, and automation could have a similar impact on productivity over the next decade.   

Looking ahead, we recognize the importance of remaining vigilant amidst lingering geopolitical and economic uncertainties. Potential spikes in the 10-year Treasury rate or unexpected upticks in the Consumer Price Index (CPI) could necessitate adjustments in the Federal Reserve's policy stance, impacting market dynamics and investor sentiment.   

It’s essential to highlight the influence of oil prices.  With WTI crude up over 16% in the first quarter and Brent surpassing $90 per barrel, energy prices have become a focal point.  In addition to their direct effect on consumer spending at the pump, elevated energy costs may pose a significant challenge to certain consumers who are already allocating a larger portion of their budgets to essential items due to inflation and sluggish wage growth.   A further uptick in energy prices, which have been impacted by the conflicts in Ukraine and the Middle East, could make the Fed’s job more difficult and potentially cause additional delay in the Fed’s timeline for implementing rate cuts.

The question remains: what's next? The market has surged almost 28% from October lows to the end of the first quarter. While volatility is relatively low, suggesting some complacency, corporate earnings have surprised, leading to a favorable decline in the forward P/E multiple.  Fed Chairman Powell anticipates potential rate cuts later this year, yet the timing is uncertain, with inflationary pressures possibly delaying action.

While we maintain an optimistic outlook for the future guided by the strength of the U.S. economy and solid corporate earnings, we recognize the potential for market consolidation following the recent rally and the possibility that the Federal Reserve needs to hold rates “higher for longer.”     

Helping you achieve your long-term goals is our top priority, and we deeply value the trust and confidence you have placed in us.

Wishing you a prosperous and fulfilling spring season.

Warm regards,

Peter J. Connors, CFA

President

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