First Quarter Review of 2024

 Robust Economy

The surge that began in November 2023 continued during the first quarter of 2024. There were significant gains in new jobs, the unemployment rate declined slightly, and year-end earnings for many companies were equal to or better than in the prior quarter. Most equity indexes were up, with the DJIA up 5.6%, NYSE Composite up 8.7% and the MSCI ACWI ex USA (international index) up 4.0%. The tech loaded S&P 500 was up 10.2%, beating most other indexes for the quarter. 

The fear that we would not have a “soft landing” that had been caused by the FED’s continued rate increases, subsided as the FED stopped any further increases. The FED also indicated that it was their intent to reduce the FED funds rate three times during 2024. This signal by the FED helped propel the markets higher.

For the one-year period, ending with the first quarter, the Bloomberg Aggregate bond index was up 2.37, with the Bank of America 100 High Yield Index up 11.7%.

Commodities Tell a Tail

As the economy heated up, the demand for commodities increased. Most commodity prices went up. The one big exception was natural gas, that was down almost 30%, while a barrel of crude oil was up just over 16%. We all saw this play out as the price of gasoline began climbing, once more. These commodity price increases will have an impact on inflation. For example, with gold prices up 7.2% in the quarter, this will translate to higher costs for gold jewelry. 

Is this All-Good News?

It seems likely that with the economy steaming ahead the FED will rethink the idea of three rate cuts this year. Their concern is that with such robust growth, inflation may take longer to abate. The Consumer Price Index (CPI) was up 3.5% in March, exceeding inflation expectations. In February the CPI inflation rate was 3.2% and expected to go down in March.

Here's the catch, with the FED fund rate so high and no reduction in sight, bond interest rates have been going up. The cost of financing a 30-year fixed rate mortgage was 7.38% at quarters end. The cost of financing an automobile rose to 7.87%. In addition, credit card debt interest has soared. All of these directly impact the consumer. If that isn’t enough, the longer-term issue is that the national debt keeps growing and the cost of funding that debt is rising. The stubborn inflation rate, coupled with increasing fixed borrowing rates, is unsettling for stock markets, resulting in greater volatility. This could result in lowering investment gains for the year.

The Public’s Response

For many workers and retirees, they have seen an increase in their income. The overall perception however is that inflation has taken away any gain that workers have received. While this can be debated, it is the perception that is most meaningful. Consumers make decisions based on how they feel about the economy. Since consumers account for about two-thirds of the economy, their perception becomes very important.

The Housing Market

For many people the idea of owning a home is desirable. Currently, many homeowners have mortgage interest rates considerably below current rates. This can impact a decision to sell a current home and upgrade to another, or even the idea of moving to a new location. For the individual who would like to buy or build a home, the current mortgage rate environment is pricing them out from doing so.

Home ownership and building new homes tend to be major movers of commerce. Appliances, upgrades, adding solar, building a garage, all of these and more are impacted by what is happening with interest rates and the affordability of such changes.

These current housing issues are further impacted by the lack of affordable apartments in many places in the U.S. Rents have been trending higher.  In response to this shortage, some cities are passing legislation to control rents. While this appears to be a great idea to some, the truth is that it reduces the desire to build or to own apartments. As maintenance costs go up, rents would be locked in and the landlord defers needed maintenance repairs, leading to an even greater crisis of housing. One other issue facing affordable housing, NIMN. Not in my neighborhood!

Looking ahead

As you can see, we are currently in what appears to be a robust economy. We can also see that there are some cracks in the economy. What needs to be done?

Congress needs to act together to reform how much money is being spent. The huge national deficits that seem to be a way of life now, need to be addressed in a meaningful way. The debt is growing and the cost of borrowing to finance the debt is growing at an alarming rate. If we continue to kick the can down the road much longer it could result in a stagnant economy.

Inflation is still a top priority, and the FED understands this and will be cautious about reducing interest rates too quickly. Part of the reality of high interest rates is that they tend to impact some parts of the economy more than others. We need to see lower rates in the next year to get a more balanced economy.

Finally, consumers must have confidence in the economy and how it’s being managed.

Ed Mallon