The Cornerstone Investment Commentary: 1st Quarter 2024

“If it ain’t broke, don’t fix it!” goes the old saying, and its wisdom was proved in 2024’s initial quarter as our continuing focus on asset classes which benefit from declining interest rate expectations again produced outsized gains, particularly in our fully discretionary client portfolios.

Specifically, global equities rose about 8% this 3-month period, adding to 2023’s gains of 21%, while the overall bond market fell slightly.  Your portfolio benefited from our maintaining an ‘over-weight’ equity mix and from our continued emphasis on shorter-term bond holdings.  Other pattens continued, too:  U.S. stocks outperformed foreign; Large-cap stocks outgained small-cap; Growth stocks outpaced value.  In each of these areas, your portfolio holds more of the ‘winners’.  Two equity categories which we have been avoiding – commodities and real estate – fared worst.

Now that equity markets have fully recovered their losses from 2022 – and in some cases achieved impressive further gains – it will eventually become more difficult for them to keep rising at this pace.  To put it differently, anyone who would have hoped for a 10% stock market return in 2024 has already received about 80% of that 10% in the year’s first three months!

As the Federal Reserve begins cutting interest rates – expected later this year – the environment should remain positive for stocks and improve markedly for bonds.  Remember that bonds rise in value when interest rates fall; this is especially true for intermediate-term and longer-term bonds.

The year’s biggest surprise has been the Fed’s delaying these cuts in the face of inflation which seems ‘stuck’ near 3%.  The Fed would prefer to first see signs of further declines.  When they do – and we believe this is a matter of ‘when’ and not one of ‘if’ – annualized bond returns are positioned to reach the 4-6% range.  At some point, shifting your bond position toward more intermediate-term holdings seems advantageous.  Looking further ahead, it could mean more opportunities for US small-cap stocks and – if the dollar falls further – foreign stocks.

We will consider all this during any rebalancing of your portfolio, and it probably goes without saying that we will be watching how markets react to the above events as this year continues to unfold.  With wishes for a healthy, restful and/or fun summer, we thank you for the continuing opportunity to work together.