Market Commentary

Leo Tolstoy once wrote, “The two most powerful warriors are patience and time” in his famous novel War and Peace. In this quote, the author reminds us that worthwhile things often take time to come to fruition.  Last year, this quote applied to waiting for the Fed to pause its rate hike program. Last year, the market delivered a 24% return to patient investors, as indicated by the S&P 500® Index, despite the Fed maintaining a higher for longer message until October. Similarly, in Q1, the market rallied an additional 10% despite the Fed pushing out rates until inflation further subsides towards its target. Although entering the year, investors anticipated rate cuts beginning in March, rate cuts are now not expected until at least June, as exemplified by the final Q4 GDP reading of 3.4%. Solid economic growth has given the Fed the luxury of being more measured in cutting rates, similar to its approach to ending its rate hike program. The market has continued to rally despite increasing 10-year Treasury rates that climbed 40 bp to end the quarter at 4.2%. We will continue to closely monitor 10-year Treasury rates as this was a key driver of the market sell-off last Fall when the 10-year Treasury rate topped 5% in October.

The market broadening began during the Q4 rally and continued into Q1. While some of the Magnificent Seven stocks continued to outperform the market, there was dispersion amongst them, with Apple and Tesla in particular down 11% and 29.3%, respectively, as both company’s growth prospects came into question due to the slowing of their end markets as well as weakness in China. While the Tech Sector continued to exhibit strong performance, outperforming sectors for the quarter included cyclical sectors such as Financials, Industrials, and Energy.  Oil prices rebounded due to supply cuts from OPEC, as well as geopolitical concerns in Russia and the Middle East. While inflation has declined substantially from its peak of 9.1%, it has remained stubbornly above the Fed’s target of 2%, reflected in the March CPI of 3.5% year-over-year.  Much of this persistence comes from rising energy costs along with housing and motor vehicle repair.  The core CPI, which excludes food and energy, was up 3.8%.  The sticky inflation readings increase the likelihood that the Fed will remain steadfast in maintaining current levels of interest rates until further signs of easing pricing pressures can be seen, especially given the solid GDP growth and low unemployment.  Given this backdrop, top sector performance in the quarter included Communication Services, up 15.6%; Energy, up 12.7%, followed by Technology at 12.9%.  Underperformers were led by REITs, which was the only sector to decline by 1.4% due to higher interest rates. While all other sectors were up during the quarter, Utilities, Consumer Discretionary, and Consumer Staples underperformed the market.  Though we could see some near-term market retracement, particularly in some extended growth stocks, given the continued rally through the first quarter, we expect further upside in 2024 if rates and inflation continue to moderate and the market continues to broaden.  

Portfolio Equity Positioning

We continued to be active and nimble through the quarter, executing several portfolio adjustments while staying in tune with the broadening participation in economically sensitive sectors.   With that in mind, we increased our exposure to Financials with the purchase of Bank of America (BAC).  The bank has been a consistent operator trading at a reasonable multiple relative to its peers while building out its digital banking platform and improving upon a diverse revenue stream (notably in wealth management and capital markets) while maintaining a strong capital position.  We also initiated a position in Disney (DIS), given its focus on achieving profitability within the streaming service segment and a renewed focus on expense management.  Target (TGT) was purchased early in the quarter in recognition of its focus on margin improvement and successes in private-label brands along with food and beverage. The consumer continues to show strength as per-basket revenue growth improves.  Looking toward non-economically sensitive sectors, we purchased Thermo Fisher Scientific (TMO), a supplier of lab testing equipment for the biopharma and mature large-cap pharma space.  We believe demand is starting to inflect higher coming out of an uncertain 2023, given the IRA bill’s impact on new capex initiatives.  Finally, we purchased Verizon (VZ), given the improved postpaid subscribers and reduced need for capex, which, therefore, improved free cash flow, supporting a solid dividend.  In addition, fixed wireless access (FWA) is showing momentum now that the 5G buildout is complete.  

Purchases were funded with the sales proceeds from Nike (NKE), Zoetis (ZTS), and Proctor and Gamble (PG).  Our position in Nike (NKE) was exited due to warnings of slowing sales in China and reduced traction with direct-to-consumer initiatives in the U.S.  Zoetis (ZTS) was sold due to concerns over competition from a rival firm with an overall slowing in veterinary visits, while trading at a relatively expensive valuation.  We exited Proctor and Gamble (PG) with the thought that additional price increases could not be sustained without sacrificing volume growth and/or trade down to cheaper brands, resulting in margin compression.  In addition to the sales mentioned, several positions were trimmed during the quarter, mostly found in the technology sector, to lock in gains and right size positions.  These included Adobe (ADBE), Advanced Micro Devices (AMD), Salesforce (CRM) and Nvidia (NVDA).  Other notable trims in various sectors were Pepsi (PEP), Linde (LIN), American Express (AXP), and Alphabet (GOOGL). 

Outlook

While we believe that the market could see further upside in 2024, it may be due for some near-term consolidation after two consecutive quarters of strong stock market appreciation following the October lows. Aside from any potential near-term pullback, we believe that the market could work higher this year, though that will depend on further moderation of the inflation rate. The economy remains resilient and continues to exhibit better-than-expected growth and continuing strength in the labor market despite the Fed’s rate hike cycle. Rate cuts could fuel additional market upside, but inflation would likely need to decline further towards the target rate before the Fed considers rate cuts.  Rate-sensitive industries such as housing would greatly benefit from any potential rate cuts or declines in the 10-year Treasury rate. Geopolitical events could prove to be a wild card this year with continued conflict in Ukraine and the Middle East. Energy prices have been impacted by the conflicts in the two regions, and higher energy prices could reduce the likelihood of rate hikes this year. We maintain a diversified portfolio and look for opportunities to add to positions that benefit from broadening of the market and add to secular growers on any pullbacks. 

Important Disclosures

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. “Connors”), or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors. Please remember to contact Connors in writing if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services or if you would like to impose, add, or modify any reasonable restrictions to our investment advisory services.  Unless and until you notify us in writing, to the contrary, we shall continue to provide services as we do currently. Connors is neither a law firm nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Connors’ current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and (3) a description of each comparative benchmark/index is available upon request.