Q1 2024 Quarterly Market Update
Market Update Q4 2024
Hi, good morning, everybody and welcome to the Rise Advisors quarterly market update for the first quarter of 2024. My name is Zach Harrington, Partner, Financial Advisor, and Chief Investment Officer here at Rise Advisors. And on behalf of my Partners, Scott, Steph, and Mark as well as our staff, Angelica, Jenna, and Danielle, I want to thank you for taking the time to watch our quarterly market update for January of 2024.
So, as we dive into today's agenda, there's a lot that's changed since we last recorded one of these videos back in October. We had the Fed raise rates for the last time in July. There appears to be a change in sentiment with the Federal Reserve that came into play during the fourth quarter of 2023. So that Fed pivot is on the horizon. We talked about that a little bit in October. We're going to talk through the labor market and inflation and all those big things are going to drive that decision for the Fed to pivot and end cutting rates.
We're also going to talk through just some market dynamics in play. One of the big things to always look at is money market funds. Where are investors piling cash? Is it into the market, into the bond market, or is it just in cash? Looking at what's known as the Magnificent Seven, think Apple, Tesla, Meta, so on and so forth. And then just the sheer dichotomy of performance within the S&P 500. We're also going to talk about some portfolio construction considerations for 2024 and some things that we're looking at just as we continue to manage your assets here at RISE Advisors.
So, focusing on the labor market, when you listen to Jerome Powell speak, one of the big things he always talked about in the battle against inflation was the labor market remaining resilient. And the goal of this whole soft-landing concept was, can the labor market remain resilient even in a higher interest rate environment? And so, when we look at the labor market as a whole and what leads to kind of a soft landing or what's taking place, it really appears when we look at this chart here, the reacceleration line is looking at a 90-day, exponential moving average. Basically weighting the most recent month of jobs data against the most further out three month data. And then soft landing is just using a simple moving average where each of the last three months is equal weight. So job market has certainly leveled off, but if we look at it on that exponential basis, there appears to be this re-acceleration. And the job market appeared to have bottomed right around July of 2023. Unsurprisingly enough that was the last Fed rate hike. The market gains a little bit of momentum from a labor market standpoint heading into the fall and some of the seasonal hiring. And as that sentiment for a Fed pivot happens right around Halloween timeframe, you have this acceleration that seemed to have taken place into year end. Certainly, something we'll keep an eye on as the year progresses.
The big thing to keep in mind too is looking at the labor market in two sleeves. So, focusing on jobs that are more on the goods employment side of things. When you think about goods employment, think production, think construction, manufacturing, agriculture; everything that comes into play with that. When we look at the services side of things, think hotels, leisure, airports, think airlines; a lot of just consumer services and things that people are taking advantage of. And you can see that right around the same time of that Fed pivot, we've seen this re-acceleration on the service side and this true bottoming out on the good side. The good side is going to take some time as rates start to come back down because a lot of those industries are just a little bit more cyclical based on interest rates. And that's exactly what this chart talks about.
So looking at those cyclical components of GDP or cyclical components of the economy; manufacturing, construction, housing, so on and so forth. A lot of those represented by the green line, you know, started to bottom out as rates came up. And then as economic conditions became a little bit easier towards spring of last year, specifically after the banks began kind of struggling, they really picked back up towards the end of the year as the Fed sentiment began to pivot and they caught back up to a lot of those non-cyclical components.
That really leads to some acceleration of the economy and that's what we felt. And part of why markets performed really well to end last year is that a lot of that economic data, which tends to look in the rear-view mirror, came out a lot better than folks expected because things have accelerated specifically in that cyclical side on the anticipation that the Fed is going to begin to lower interest rates.
One of the things that we think is something to look out for is where folks are allocating dollars, specifically retail investors. And traditionally, like one of the best places to look for, how do I explain it simply like if you want to know where to allocate money, look at where retailer do the opposite of what retail investors are doing. And so, you know, if we go back and look like retail investors and money market funds hit a high during the 2008 recession, right around the end of 2008, right before the market bottomed out. And then by the time investors got back to some of those pre-recession levels, the market had already recovered mightily. You can see that money markets really took off at the start of 2020 peaking around March, right at the time in which the Fed steps in provide zero interest rates, all of these backstops, PPP loans, so on and so forth. And by the time folks get back out of cash into the market, it's already rallied.
And so that theme plays on and on. You know, rates here are where the Fed starts raising rates. You start to see this uptick as we get into 2023. One of the previous highs we saw was October of 2022, um, which led to a market rally to start 2023. And then as we got towards the end of last year specifically right around the end of the third quarter, you know, money markets hit $6 trillion just in time for the fed to pivot and just in time for markets to rally. The important thing to keep in mind is that this money is sitting in cash because a lot of investors look at what you can get in your savings account or money market fund right now and they want that.
However, as those rates start to come back down, this money is going to need to be reallocated. And that's one of the big things we're going to focus on is if we're forward looking and we're seeing that, you know, rates are going to come back lower, and investors are going to shift out of those treasuries and corporate bonds and so on and so forth. Where’s the money going to go as investors look to chase yield?
So as we look at the stock side of things, one of the real key things of 2023 was if you owned what's known as the Magnificent Seven, which are the seven largest companies in the U.S. you did quite well. A lot of you do own those through your S&P 500 ETFs or mutual funds or your broad U.S. assets. And those seven companies, Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla, those seven companies are beyond gigantic. And I feel like a lot of times investors don't realize just how large they really are. When you look at the Magnificent seven, the market cap of them is equivalent to the size of the entire stock market. So every single company listed in Japan, Canada, and the United Kingdom combined. So these are monstrous companies that make up such a large portion of your portfolio. And so for a lot of you, you've seen some of these that may have been owned individually get paired back or removed from your portfolio just based on the fact that they've become such a big component of the exchange traded funds and mutual funds that we own.
And so when we pair together some of the thoughts around the economy and the fact that the Fed might have pivoted, rates are going to come lower. On top of looking at the fact that there's money and money markets that investors are going to have to allocate somewhere else. Stack on top of that, the fact that the magnificent seven makes up so much of the economy because they performed so well as tech has outperformed in this higher interest rate environment, it's important to realize that there are other companies to own besides that magnificent seven. And in different circumstances when rates aren't necessarily as high, some of the more value-oriented names of the market do end up performing quite well.
2023 was not one of those cases. And so in that higher and straight environment, as tech is dominated, 72% of stocks in the S&P 500 underperformed the index last year. That's a, that's an incredible number three-in-four companies underperformed what the S&P 500 did last year. It was one of those things where unless you really owned large cap tech, you may have fallen into this category. So the important thing to keep in mind is in periods where you get this massive, massive outperformance in which these massive companies underperform the index, there tends to be this really consistent behavior in which in the years to follow, a lot of them catch up and even outperform the index.
So going and looking at the, you know, the period here in the early Eighties, you see a period in which, you know, 70 something percent underperformed and then only 25% the following year underperformed what the index did. Same thing here, when we go back and look at right before the tech bubble, tech bubble hits a lot of out-performance because tech, everybody else performs. The same thing plays out in 2008. Same thing happens right around the pandemic timeframe. So really important to keep in mind that you know, what's on sale today or what's undervalued today does eventually catch back up over time.
And that's what we're looking at. When we look at where we think portfolios should be allocated or considerations for 2024 for us, there's really three things to look at on the bond side of things. And a lot of you already are seeing exposure and we've already done things to allocate to this.
Even if a hawkish Fed, so meaning a Fed that wants to stay persistent with higher interest rates, you're getting rewarded to sit there. So you're getting these yields that are gonna pay off. But we think it's really important to, to keep in mind that as those rates come down, the price of bonds come up. And so we want to continue to own longer duration bonds. You know, for a lot of you, you own AGG or DFCF or WOBDX or JMBS, so on and so forth. These are names and tickers that should look familiar. We think that the total return potential in the bond market is the best that investors have seen in 15 years stock market opportunity.
So when you look at that magnificent seven and you look at tech, they look expensive and a lot of people talk about an overpriced market, but the market appears to be overpriced because of how much those companies make up of the market.
Value stocks that have underperformed as investors left those names to seek higher yielding and less risky fixed income. I think, and we think your Rise Advisors, are a tremendous opportunity for investors. So when you think of those traditional dividend paying stocks that pay a two and a half, three and a half, 4% dividend, you take on a little bit of stock risk, they're not as attractive when you can go earn four and a half percent in your savings account. But as those yields come down and investors seek that yield elsewhere because the Fed has lowered interest rates, these are a great opportunity and you can get them at a discount right now relative to tech, relative to the broad market, and relative to historical averages. We really like value stocks and you'll see VTV and a lot of value type ETFs pick up in your portfolios here throughout 2024.
The other thing we're paying close attention to is what we're calling the healthcare renaissance. I will joke, my wife thought this was a little bit corny, the whole renaissance with AI, I like it, maybe I'm a little bit corny, but AI bubbles are very likely for the tech sector. If you think back to what happened with cryptocurrencies throughout, you know, 2019, 2020, 2021, when there's a lot of players and a lot of things going on, money spread wisely or spread unwisely and there's a lot of different money being allocated as markets mature and as investors get a little bit more understanding of what needs to happen, there's less and less players in space.
This happened with a tech bubble in the 2000s. It happened with some of the crypto stuff that took place over the last three or four years. I don't think AI is any different. There's a lot of companies that are trying to rush and figure out how they can implement this on a broad scale and bring it to consumers. I think there's only going to be a few players that make it. Where we're looking at it is not where we can get AI exposure in the developer space, but what industries are going to be helped out and be more profitable based on AI being introduced.
One of the big ones we think is healthcare. And so when you think about what something like artificial intelligence can do. If it can streamline your patient experience, if it can streamline your ability to ask questions about, a prescription drug you're taking or an ailment you're having or even be able to understand and make a recommendation based on what might be happening to you, this allows doctors and nurses and PAs and nurse practitioners to become less bogged down and less overwhelmed, allows them more time to spend with patients in person. It allows for the pharmacies to be more efficient as a lot of prescription drugs are being administered via patient records and via, you know, an AI chatbot. So we think healthcare should see expanded margins, should see better quality of care, and overall be better for consumers based on an AI introduction. So one of the things we are looking at is adding healthcare into your portfolio specifically.
So, here's just the sources to cover kind of everything we talked about today. Once again, we're sitting here in January of 2024. 2023, although a very volatile year and very uncertain year ended up being a great year for investors. We think there's great opportunity in the bond market. We think there's a great opportunity in healthcare and a great opportunity in value stocks. So with that being said, once again, I'm Zach Harrington, Partner, Financial Advisor and Chief Investment Officer here at Rise Advisors. I want to thank you for taking the time to watch our quarterly market update. And as always, if you have any questions, I'm here and available to talk through anything that's going on in your portfolio. Thank you so much and have a wonderful 2024.
Disclosure: This presentation is for Informational purposes only. All investment strategies including rebalancing and diversified asset allocation have risk. Past performance of our investment approach, component holdings and methods does not guarantee future results. Advisory services offered through Rise Advisors, LLC ("Rise") Registered Investment Advisor. While all data is believed to be from reliable sources, accuracy and completeness are not guaranteed.
Sources:
1. BLS, Haver Analytics, Apollo Chief Economist 1/12/24
2. BEA, Haver Analytics, Apollo Chief Economist. Note: Cyclical components include
interest-sensitive components, i.e., durable goods consumption, nonresidential
structures, equipment investment, and residential investment. Non-cyclical
components include non-durable goods consumption, services consumption, and
nonresidential investment in intellectual property products.
3. Bloomberg, Apollo Chief Economist 1/06/24
4. Bloomberg, Apollo Chief Economist 1/14/24
5. Bloomberg, Apollo Chief Economist 1/03/24
6. BEA, Bloomberg, Apollo Chief Economist 1/16/24