Veris Economic and Market Update: Q1 2024
Sources: US Bureau of Economic Analysis, FRED, and Bureau of Labor Statistics2
Note: RS and LS refer to the right and left series in the chart
Public equity markets had positive returns in Q1 as earnings and economic data remained strong and soft-landing optimism persisted. Valuation concerns were brushed aside by strong revenue growth and earnings and the stock market rally broadened beyond the winners of 2023. Technology companies continued to benefit from the artificial intelligence exuberance. US markets outperformed developed international and emerging markets on the back of a strong dollar. While higher than expected inflation, rising yields or the probability of rates staying higher for longer didn’t affect the stock market performance, bond markets were negatively impacted.
Source: Morningstar 3
The seven US large-cap companies – Microsoft, Apple, Nvidia, Meta, Amazon, Tesla, and Alphabet – which were responsible for more than half of the gains in 2023 have been dispersed in 2024. Nvidia and Meta lead gains while Tesla and Apple lagged the S&P 500. The “Magnificent Seven” represented approximately 29% of the S&P 500 Index weight and accounted for 37% of the S&P 500 Index returns for Q1 compared to 58% in 2023. This poses significant concentration risk. Meta, which owns brands including Facebook, Instagram, and WhatsApp, was up 37% in Q1 and 129% over the last 12 months. Nvidia rose 82% in Q1 and a staggering 225% over the last 12 months.
Source: US Bureau of Economic Analysis, FRED, & Bureau of Labor Statistics 6
Source: Federal Reserve Bank of St. Louis 7
Through low unemployment and increasing labor participation, wage growth for low-income workers in America has had its steepest increases in 40 years. 8 Increases to minimum wages in 28 states since 2020 have contributed to this spike in income for these workers. 9 Congress has failed to increase the federal minimum wage for 14 years, leaving it at $7.25 for workers in states and municipalities that haven’t taken action.
Along with those policy gains raising many minimum wages, 2023 saw a resurgence of strength from organized labor. Labor wins included established unions such as United Auto Workers and those representing Screen Actors and Writers, as well as new independent unions representing workers at some Amazon plants and Starbucks stores.
Source: Economic Policy Institute 10
Headline inflation rose to 3.5% in March, up 0.1% from December 2023. While this is a meaningful drop from the peak of 9.1% in June 2022, recent data has indicated that inflation could remain sticky and be slow to drop to the Fed’s long-term target of 2%. Core CPI, excluding food and energy, is downward trending but remains high driven by elevated shelter (housing) inflation and transportation services. The Producer Price Index (PPI), an indicator of future inflation, rose in March but transportation services which drove March CPI came in softer than expected suggesting a continued downward trend. The Fed left interest rates unchanged in March and the markets now expect one rate cut instead of three in 2024.
For context, the most recent prior period of high inflation, The Great Inflation, spanned from 1965 to 1982, reaching over 18% at its peak in 1980.11 About 25% of the US adult population has prior experience weathering high inflation (including all Americans old enough to have been adults during the inflation crisis ending in 1982).12 For the other ~75% of the adult population, experience with price volatility has been most apparent in fluctuating gas prices, until the last couple of years. The Fed focuses on core measures of inflation, stripping out food and energy to remove the most volatile elements, smoothing out inflation in an attempt to better measure the impact of monetary policy.13
Source: Federal Reserve Economic Data (FRED) 14
The approach of the Fed, stripping out food and energy, differs from many consumers, some of whom focus and experience inflation most on food and energy. While energy prices have increased significantly over the last four decades, they have gone up for periods and then eventually retreated at least partially back towards prior prices. This is very different from the broad CPI measure of inflation which primarily goes up at high or low rates, but very rarely is negative. Of all the monthly data going back to 1965, less than 2% of monthly measures of year-over-year changes to CPI have been negative. Prices go up consistently, but unlike what we have experienced with gasoline, they rarely go down. This may have contributed to the confusion amongst consumers who have not yet experienced prolonged inflation as to why prices don’t return to prior levels when inflation growth rates drop.15 Economists warn that price decreases, deflation, is potentially harmful to the economy.16 If consumers expect prices to drop, they delay purchases in anticipation of lower prices. This can contribute to a slowing or spiraling economy, rather than the desired soft landing. The length and severity of The Great Inflation likely contribute to the cautious approach of the Fed, declining to lower interest rates while reductions to inflation remain unstable.
Source: Federal Reserve Economic Data (FRED) 17
Source: Federal Reserve Economic Data (FRED) 18
