It has been said that “good things come to those who wait.” That phrase has never been more accurate than for the Crimson Tide who, for the first time in the program’s 111-year history, patiently punched their very first ticket to the NCAA MBB Final Four. The University of Alabama, more often associated with football, surprised everyone (including the bookies) by clinching a nail-biting victory against Clemson. While “Bama” was indeed favored for the win, Vegas miscalculated the odds, resulting in a lot of happy customers, much to their chagrin. Yep, get ready for tipoff, it’s “hold on to your brackets” time as March Madness fills our TV screens and sportsbooks across America. Whether you are a fan or not, this annual event does feel like a better predictor of the arrival of Spring than the status of Punxsutawney Phil’s shadow!
While March Madness can be associated with risk and gambling, ironically these handicappers are not too unalike from the pundits on Wall Street. Economists and analysts alike take data in and based on the information, try to predict the best reasonable outcome. While Phil only has one arrow in his quiver, there are countless measurements and datapoints about the economy that can help guide the markets and investor mentality, rational or not. These data points are also shifting and evolving at almost lightning speed. For instance, people used to count cars in parking lots to quantify retail foot traffic. Now, we must look at online sales and ride-share traffic to make this determination (who wants to park?). In addition, Artificial Intelligence is now scouring this data and making its own so-called “predictions.”
But what is all this data good for if there is always a chance for an upset? You may be familiar with the saying “there are three kinds of lies: lies, damned lies, and statistics.” They will fool you every time and can be manipulated to make any argument a possibility. Take the rule of thumb that the US economy always enters a recession when the yield curve inverts (when short-term rates become higher than longer term rates). Well, we have been anticipating the said recession for quite some time (20 months to be exact), with no obvious signal in sight. Meanwhile, we wait patiently for the Fed to lower rates again, with no glaring imminent reason why. The bond market seems to be interpreting this with longer yields rising (the 10-year yield rose from 3.88% as of year-end 2023 to 4.20% at the end of 1Q 2024), predicting a higher for longer environment. Equities, on the other hand, continue to rally (S&P rose 10.6% in Q1, closing at a record high for the 22nd time during the quarter) seemingly confident that the “goal” is in sight and rates will begin to reverse course. Before things get too heated, a “timeout” may be in order.
At the end of the day, the only one truly refereeing the game is the Fed, and they are focused on two distinct fouls: Player A (Inflation) and Player B (Unemployment), both of which are showing signs of “unsportsmanlike conduct.” February inflation data surprised with the CPI up 3.2% year over year, primarily still driven by the services sector. Meanwhile the Fed’s preferred measure of inflation (the Personal Consumption Price Index “PCE”), came in slightly cooler, but still rose from 2.4% to 2.5%. Gasoline prices are up (WTI Crude increased to $83.20, up 3.8% from $71.70 at year-end) and so are everyday groceries like chicken (must be all those buffalo wings being ordered at the sports bars!).
In addition, the labor market remains strong with non-farm payroll gains up 275,000 in February and the 3-month average was a robust 265,000 despite downward revisions in the first two months of the year. Unemployment settled at 3.9% and wage growth is still a whopping 4.5%. In short, we are far from a Slam-Dunk on slowing the economy.
Fourth quarter GDP was revised higher at 3.4% from 3.2%, mainly driven by consumer spending, especially in healthcare as well as local and federal government expenditures. Given the recent events of a cargo ship taking down the Francis Scott Key Bridge in Baltimore, we may see further pressure on government spending and additional supply chain headaches (transitory inflation). Full year GDP estimates are averaging 2.1%, a significant rise from the 1.4% reading in December.
Despite what appears to be a strong economy and the argument for staying put, there are a few players still on the bench. The consumer appears to be bifurcated into the “haves” and “have nots,” and the underdogs are continuing to feel the pain in their wallets, which could have implications for the most important part of the U.S. economy: consumer spending (consumer spending makes up roughly 70% of GDP). Auto loans and credit card delinquencies have risen above pre-pandemic levels along with the total amount of outstanding debt. The recent Consumer Confidence Index declined slightly in March, falling short of expectations. More importantly, while the “Present Situation” component rose, the Future Expectations component fell to 73.8 (a level of 80 or lower has historically signaled a recession in the next 12 months).
There also continues to be real pressure in the commercial real estate sector. Lending has declined sharply and with the amount of revolving debt coming due over the next two years, the lagged effect of higher rates is not completely known. Bankers have been “jokingly” using the terminology of “amend and pretend” and “pray and delay,” which equates to pushing out a borrower’s loan maturity date by a few years and collecting extra fees in exchange for their “flexibility.” In reality, bankers have no other choice unless they want to take the keys!
As such, it would appear that we are not quite at the two-minute marker and have a lot more traveling to do up and down the court. No matter which jersey you are wearing (which camp you reside in), it seems that we all need to have a little more patience and sit back and enjoy the game.
Closing Thoughts
It’s fitting that the term “March Madness” was first used in 1939 when Illinois high school official Henry V. Porter referred to the original eight-team tournament by that moniker. He is quoted as saying, perhaps “a little March madness may complement and contribute to sanity and help keep society on an even keel.” With all that is going on in the world today, it puts priorities in perspective. At Ulrich, we are a family first. We believe in teamwork in order to reach our clients’ long-term goals. This isn’t a one free-throw shot, one quarter game or tournament. Managing your wealth is a constant obsession of watching and protecting you, “the ball.”
Put me in coach!
Regards,
John P. Ulrich, CFP®
President
Whitney E. Solcher,CFA®
Chief Investment Officer
Equity Markets
U.S. stocks rallied sharply in 1Q with the S&P 500 Index (+10.6%) closing the quarter at a record high for the 22nd time during the quarter. Communication Services (+15.8%), Energy (+13.7%), and Technology (+12.7%) were the top-performing sectors with Real Estate (-1.1%) being at the bottom and the only sector to deliver a negative return. The equal-weighted version of the Index gained a more modest 7.9% as the largest stocks continued to outperform. The top 10 holdings hit another high at 33.5% of the Index on a cap-weighted basis. Growth (R1000 Growth: +11.4%) outperformed Value (R1000 Value: +9.0%) and large cap (R1000: +10.3%) outperformed small (Russell 2000: +5.2%). Of the “Magnificent 7,” only Apple (-10.8%) and Tesla (-29.2%) suffered losses. The Mag 7 were up 13% for the quarter, with the S&P 500 Index ex Mag 7 up 6%.
The U.S dollar strengthened against most currencies, most notably the Japanese yen (-7%). The MSCI ACWI ex USA trailed the U.S. with a 4.7% gain (Local: +8.2%). Technology (+10.7%) was the best-performing sector. Most countries delivered gains but from a regional perspective, Pacific ex-Japan (-1.7%) was hurt by weak performance from Hong Kong (-11.7%). In contrast, Japan (+11.0%) saw double-digit gains that were even better in local terms (+19.2%). Emerging Markets (MSCI EM: +2.4%) were up modestly, trailing developed markets. Latin America (-4.0%) was dragged down by poor results from Brazil (-7.4%) and Chile (-4.5%). China (-2.2%) also weighed on emerging market performance.
Fixed Income Markets
Bond yields rose modestly in 1Q as expectations dwindled for aggressive rate cuts amid stubbornly high inflation. The U.S. Treasury 10-year yield rose from 3.88% as of year-end 2023 to 4.20% at the end of 1Q 2024. The Bloomberg US Aggregate Bond Index fell 0.8% for the quarter. Ten-year breakeven spreads, a measure of the market’s expectation for inflation over the next decade, rose from 2.16% to 2.32%. U.S. TIPS outperformed nominal U.S. Treasuries (Bloomberg US TIPS: -0.1%; Bloomberg US Treasury: -1.0%). Investment grade corporate bonds outperformed U.S. Treasuries by 89 bps on a duration-adjusted basis, fueled by strong demand that easily absorbed record supply for a first quarter and the second largest quarterly issuance ever. High yield corporates (Bloomberg HY: +1.5%) outperformed the investment grade market despite an uptick in the default rate to 5.7%, according to data from Barclays Research. Leveraged loans performed even better (CS Leveraged Loan: +2.3%).
Rates rose in most developed markets and U.S. dollar strength eroded returns for unhedged investors (Bloomberg Global Aggregate ex US: -3.2%; Hedged: +0.6%). Emerging market debt performed relatively well, especially high yield. The JP Morgan EMBI Global Diversified Index rose 2.0% with the high yield component up 4.9%. Conversely, the local debt GBI-EM Global Diversified Index sank 2.1%. Currency depreciation vs. the U.S. dollar hurt returns; the local currency return for the Index was +0.7%. Most currencies were down vs. the dollar for the quarter.
Municipal bonds outperformed taxable bonds for the quarter. The Bloomberg Municipal Bond Index fell 0.4% with lower quality sharply outperforming higher quality (AAA: -0.8%; BAA: +0.6%). The Bloomberg Managed Money Short/Intermediate Index fell 0.9%. Robust demand easily absorbed supply and most municipal/Treasury ratios remained well below historical averages.
The views expressed represent the opinion of Ulrich Investment Consultants. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from sources that have not been independently verified for accuracy or completeness. While Ulrich Investment Consultants believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Ulrich Investment Consultants’ view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.