QUARTER 1, 2024 NEWSLETTER

As we write this, Maine has just experienced its first total Solar Eclipse since 1963. The state enjoyed clear skies, and some of the best views of totality seen in the country. We live outside the area of totality, but still enjoyed an amazing view of the moon blocking out all but a sliver of the sun, bringing on a sudden twilight at 3:30 in the afternoon, catching the attention of birds, dogs in the neighborhood, and the Spring Peepers who had just begun their ritual nocturnal concerts a few nights before. We knew during the 1963 eclipse when the next total eclipse would be visible in Maine. Thinking about where the markets have gone since last quarter, and what the second quarter might bring, and comparing that to the ability to project when and where a total eclipse will next occur at any place on the globe with complete accuracy, gave us pause. If only the markets were that simple.

An article in Astronomy magazine written April 19, 2023, by Sabine Bellstedt about another eclipse, explained that many ancient civilizations independently developed the ability to predict the timing of a total solar eclipse through careful observation, mapping of celestial movements, and the application of mathematics. But it wasn’t until 1715 that Edmund Halley was able to predict both the time and the location, within 4 minutes and 20 miles. In modern times we take for granted the accuracy with which these events can be predicted.[1]

On the opposite end of the prediction accuracy spectrum is building a perfect bracket for the NCAA’s March Madness Tournament. Predicting the outcome of 63 games in a single elimination event has become an annual obsession for many; but the odds of choosing a perfect bracket are truly astronomical. In 2014, Warren Buffet famously offered a billion-dollar prize to anyone who succeeded. The windfall has yet to be claimed; and mathematicians believe it will likely not happen. This time of year, we often see articles from investment advisory companies comparing the futility of picking a perfect bracket with that of picking a winning equity portfolio in a one-shot selection that doesn’t offer an opportunity to make new choices as developments occur or new information comes to light. 

A strong rally in the last few weeks of 2023 reversed what had been a difficult year for the markets (think about your bracket getting hit by an upset or two at every level of the tournament). The rally resulted in the S&P 500, DJIA, and the NASDAQ all squarely in positive territory for the year. This rally has broadened, and momentum has carried us through another positive quarter. Forbes Advisor’s April 2024 Market Forecast, by Wayne Dugan, reported the S&P 500 hit an all-time high in March, and finished the quarter with the best first quarter growth record since April of 2019. The report notes, “investors are optimistic the market can maintain its mojo in April, which has historically been one of the strongest months of the year for the S&P.”[2]

Statistics appear to back up that enthusiasm. Lincoln Financial Group featured a Morningstar S&P 500 Price/ Return Index recently for the first quarters of Jan. 1945 to March 2024. There were 11 quarters in which the S&P’s return was positive by 10% of more. In 10 of those 11, the next 3 quarters were positive with an average of 6.5%. And in all 11, the resulting year-end gain was an average of 21.4%.[3] Of course, historical statistics can only take you so far. Much could cause a different outcome this year despite a positive start. Like with the NCAA Tournaments, many brackets suffered an eclipse this year, as teams who statistically should have won, did not, either because their opponent was stronger that day, or an outside circumstance. It begs the question, what might go wrong (or right) for the investment markets between now and the finish of 2024?

The Fed continues to press the pause button on rates and indicates some rate cuts may come later this year, when their time-out is over. But they have been clear they could resume rate hikes if needed to keep inflation from staging a comeback. Both the equity and bond markets have been watching carefully and reacting to mixed signals from economic numbers and from the Fed. Dugan’s Market Outlook report notes that the New York Fed Recession Model still shows a 58.39% chance of a recession sometime in the next year.[4]

While the economy is showing resilience and job numbers are improving, some areas of the CPI have remained stubbornly above the Fed target. So called ‘Sticky Inflation’ will, Duggan notes, “make the last leg of the Fed’s mission the hardest of all.” Sticky Inflation refers to the tendency of pricing for certain products and services to change more slowly and in smaller than average increments as the CPI drops. Rent, for example, increases during inflationary times due to rising costs. After some time at those levels, consumers grow used to the higher price. Over a long period, higher prices can stick, or become persistent, even though costs to the providers have come back down.

The upcoming national election is likely to have some ramifications for the market. The prospect looms for a divided government, which in recent years has tied the hands of Congress in attempting to pass various pieces of legislature. A clean sweep by one party may benefit certain sectors of the market, and hamper others. In any event, the new regime will need to deal with an ever growing budget deficit. Internationally, the Israel-Hamas war continues with little movement in negotiation attempts with no end in sight.

While domestic equity markets have remained in the green throughout the first quarter despite uncertainty about the Fed’s plan, concern has turned the strong performance of bonds in December and January into negative year-to-date and 1-year performance figures for 10-year Treasuries, Corporate Bonds, and Global Bonds as of the end of March. Only Municipals hold onto a slight gain on a 1-year role as of Griff Curtin’s 04/05/24 ‘What Happened Last Week” posting.[5] This may be an opportunity to buy bonds, “to get ahead of the shift from cash to bonds,” Alliance Bernstein’s Scott DiMaggio pointed out. He warns bond investors, “don’t miss the forest for the trees.” DiMaggio notes that bond yields typically fall, and their prices rise BEFORE Central Banks act to lower rates.[6]

We hope that many of you witnessed the stunning solar eclipse. Even watching the total eclipse on television was a moving and humbling experience. March Madness 2024 is now in the record books. We congratulate the winning teams in the Women’s and Men’s final games, and all the talented players who brought us some outstanding basketball. Spring has arrived and is just waiting for Mother Nature and the calendar to get in sync. We look forward to working with you as we head toward summer and will be preparing for opportunities which present themselves. Thank you so much for your trust in us.

  Warmly,

      The Galarneau Group

These are the opinions of The Galarneau Group and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in securities involves risk of loss.  Further, depending on the different types of investments there may be varying degrees of risk. Past performance is no guarantee of future results.

Securities offered through Cambridge Investment Research, Inc., Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., Registered Investment Advisors. Cambridge, and Galarneau Group Wealth Management are not affiliated.