April 2024 Monthly Commentary

Greetings Team,

If it is indeed true that history repeats itself, then we should all be prepared to embrace the nostalgia of the past. Imagine dusting off your favorite platform shoes, grooving to the Brooklyn Shuffle, and belting out the iconic tune of "Staying Alive." Why, you ask? Well, according to the influential voice of JPM CEO Jamie Dimon, the US economy is showing striking similarities to the vibrant 1970s. We're talking about a significant fiscal deficit, a massive amount of quantitative easing, and various factors that hint at future inflation, such as the green economy, global re-militarization, high deficits, and geopolitical tensions. Before we delve into these topics in more detail, let's first take a closer look at the current state of the US economy.

The month of April bid farewell with a rather unpleasant surprise for investors. All three major benchmark indexes experienced their worst monthly percentage declines of the year 2024. The Dow Jones Industrial Average’s April loss extended to 5%, marking its most significant monthly decline since September 2022. In sync with this downturn, the S&P 500 and NASDAQ Composite each experienced a drop of approximately 4%, recording their first monthly decline since October. Now, you might wonder if this was just a minor correction in a market that seemed to only know one direction: up. Well, upon closer examination, it becomes evident that there is more at play than meets the eye.

Let's start by looking at core personal consumption expenditures (PCE), which serves as the Federal Reserve's key measure of inflation. Brace yourself for this startling revelation: PCE rose at a rate of 3.7% in the first quarter of 2024, well above the Fed's target of 2%. Additionally, Gross Domestic Product (GDP), the broad measure of goods and services produced from January to March, grew at an annualized rate of 1.6%, falling short of the estimated 2.4%. As a result, markets slumped, and treasury yields rose. Why? Well, it's a classic case of the worst of both worlds – slower-than-expected growth combined with higher-than-anticipated inflation, a phenomenon commonly referred to as stagflation. Whether the US economy is truly heading into a period of stagflation is yet to be determined, as GDP figures will undergo multiple revisions in the coming months. Nevertheless, this puts the Federal Reserve in a precarious position as it strives to fulfill its dual mandate of promoting maximum employment and maintaining price stability. The challenge lies in the fact that the Fed's primary tool for controlling inflation, namely interest rates, is already in "restrictive territory," as indicated by Fed Chair Jerome Powell in previous FOMC meetings. If the Fed hesitates and decides to raise rates to combat inflation, the resulting increase in borrowing costs could bring the economy to a screeching halt, leading to significant job losses. On the other hand, cutting rates too soon would only exacerbate inflationary pressures. Hence, the only viable option seems to be maintaining interest rates at higher levels for an extended period. However, the duration of this strategy remains uncertain. The Fed may provide some guidance during today's FOMC meeting, but it's best not to hold your breath.

Now, let's shift our attention to what all of this means from an investor's perspective. While AI has been dominating the headlines, recent Big Tech Earnings have shown that investors are increasingly seeking clarity on how AI investments will translate into advertising revenue. Take Meta, for instance. Despite the company's impressive earnings, its shares tumbled due to concerns about near-term AI spending. It appears that fundamentals are regaining importance. Investors are gravitating towards companies with solid balance sheets that can thrive even in the presence of inflation or if the Fed decides to eliminate rate cuts this year. Certain healthcare companies fit the bill, given their more affordable valuations and a return to focusing on the basics. In an environment of rising rates and inflation, it becomes crucial to consider the price paid for assets. And here's an added bonus: the healthcare sector, known for its defensive nature, also offers exciting opportunities in biotech innovation. So, if you're seeking innovation, fear not. AI has its merits, but let's not forget about the innovation happening within biotech, such as robotic surgery, and the potential for transformative growth within the healthcare industry.

As we navigate through these turbulent times, it's important to remember that investing carries risks. Just as a skilled disco dancer resists the temptation to break away from the rhythm of the music, staying the course in investing means resisting the urge to make impulsive decisions based on short-term market fluctuations or emotions like fear or greed. By maintaining discipline and sticking to your long-term investment plan, you can groove through the ups and downs of the market, avoiding hasty decisions that could harm your portfolio.

So, let's keep the beat, stay focused, and continue moving onward and upward, always.

Steven & Daniel