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April 6, 2024 Market Update

U.S. stocks fell for the first time in three weeks, posting the deepest weekly setback of the year.  The S&P 500 Index was down 1.0% at Friday’s close vs. the week-earlier level, although the slide barely put a dent in the market’s 2024 rally, which clocks in at a slightly-diminished but still-strong 9.1% advance.

The bond market lost ground, too, trading near the lowest level of the year, based on the Vanguard U.S. Total Bond Market ETF (BND), a proxy for U.S. investment-grade fixed-income securities.  BND’s 1.0% weekly decline left it a bit deeper in the red for the year and is now off 1.7% so far in 2024.

With the first trading week of the second quarter behind us, it's a good time to recap how the markets performed so far this year and consider what may lie ahead for the balance of 2024. 

Undeterred by bear market predictions, America's stock market generated strong returns in the first quarter, gaining 9.6%, based on the performance of Vanguard's Total U.S. Stock Market ETF (VTI).  The Q1 rally was led by technology stocks, especially the companies perceived as most likely to benefit from the artificial intelligence boom.  The equity market's robust performance is even more impressive considering that stubbornly high readings on inflation lowered expectations for Federal Reserve interest rate cuts in 2024.

In contrast, the bond market was not able to sustain the rally it enjoyed in the final quarter of 2023.  Bond prices fell, and yields rose in Q1 on diminished expectations for Fed rate cuts and slowing progress on reducing inflation.  Vanguard’s Total U.S. Bond Market ETF (BND) declined by 0.7% in the first quarter.

As for Q2, market pessimists expect a possibly severe stock market correction before the end of the year.  They fear valuations are beginning to look frothy and that the gains have been too narrowly concentrated in just a handful of stocks.

Bullish investors disagree.  They argue that due to improved corporate earnings, a strong U.S. economy, and the Federal Reserve’s assurances of interest rate cuts, the market’s soaring prices and higher valuations are warranted.

As for me, I don’t believe we are experiencing the degree of speculation that traditionally precedes a sudden and severe market correction.  Then again, by most metrics, stocks are expensive compared to what they sold for in the past.  As a result, the margin for error is becoming thin.  Therefore, absent an unforeseen development, I expect a period of relative stability during the balance of the year.

Fortunately, I do not have to rely on my intuition when making investment decisions.  I work with a strong team of quantitative analysts who have developed a large variety of data-driven market indicators that I can draw upon.  But the market and economic situation is quite fluid.  So don’t be surprised if there is a change in my thinking 

In the longer term, what worries me most is America's ongoing fiscal challenges, combined with Washington's efforts (or lack thereof) to address them.  But I'll save that discussion for a future email so I don't spoil the rest of your weekend.

That’s all for now.  Have a great weekend and invest wisely, my friends.