FINANCIAL MARKET INSIGHT

HIGHLIGHTS

• Market Preview: Updated Risk/Reward Outlook
• Economic Update: What you need to know in plain English
• Special Reports:
  • What Is the Bitcoin 'Halving?'
  • What the Fed Decision Means for Markets: Still All About Growth

STOCKS

✓ What's Outperforming: Growth factors, including tech and communication services have outperformed thanks to strong earnings and continued "AI" enthusiasm while energy and financials have both had solid runs into the end of the quarter.

✓ What's Underperforming: Defensive sectors, including real estate and utilities as well as value styles have underperformed recently as Treasury yields have risen, although they are poised to rebound substantially if growth slows down.

Market Outlook & Risk/Reward

This month the stock market rallied to new record highs as the Fed (FOMC) maintained its expectation for three rate cuts this year while simultaneously upgrading its outlook for domestic economic growth. The uptick in inflation expectations was largely dismissed because, as long as, growth holds up, "slightly sticky" high inflation will be tolerated.

However, growth is the key variable as an economic slowdown is not at all priced into the market with the S&P 500 trading above 5,200 at a never-before-sustained next, 12-month multiple of 21.5X expected current-year earnings.

To be sure, history has proven on multiple occasions that markets can remain irrational longer than even the most seasoned investors can remain solvent, which is why it would be a fool's errand to try to short this market based on fundamental caution right now. There is simply too much bullish momentum behind the advance. To that point, the bullish fundamental mantra for 2024 is still intact based on the expectations for:

1. imminent rate cuts this year,
2. continued disinflation,
3. resilient growth, and
4. ongoing AI optimism.

All that is great, and we are hopeful this rally can continue to new highs.

Playing devil's advocate, using the round number of 10% to perform a quick risk-reward assessment of the market, the S&P 500 is up nearly 10% YTD; and another 10% gain from here would take the S&P 500 to just shy of 5,800. This would mean an extremely stretched multiple of 23.8X this year's expected earnings. Conversely, a 10% pullback from here would take the S&P 500 down towards 4,735, which would mean a much more reasonable multiple of 19.5X this year's earnings and match the "Current Situation" midpoint price target from the March Market Multiple updates.

So, if everything remains perfectly "Goldilocks" between economic growth, inflation, earnings, and Fed policy, there is a case to be made for that next 10% to the upside. However, the number of risks to the overextended rally leaves our investment team a bit skeptical about meaningful further upside and cautious (not bearish) about the YTD gains as one negative catalyst (i.e. a hot inflation print or weak growth report) could spark volatility and a pullback in stocks, which would likely be amplified by the combination of an increased amount of leverage in the long mega-cap tech trade, and a historically overcrowded short-volatility position.

Economic Data (What You Need to Know in Plain English)

This month the market's focus was on the March Fed meeting, which proved to be a bullish catalyst for markets. Economic data was mixed, as several reports met the perfect "Goldilocks" criteria needed for a soft landing, while others were a bit less encouraging.

Chairman Powell and the company did not disappoint with their Summary of Economic Projections which revealed an upgraded outlook for growth and still mentioned three rate cuts anticipated for this year, which overshadowed a modest increase in their inflation expectations for 2024. Powell confidently proceeded through the Q&A session and there were no surprises, statements or comments that discounted the dovish-leaning outcome of the FOMC meeting. That saw stocks sprint to record highs amid firming confidence in the prospects of a soft landing in 2024.

No material moves in the weekly jobless claims data and a strong Philadelphia Fed Business Outlook Survey provided very optimistic forward-looking indicators and evidence of easing price pressures, as well as, improving corporate margins. Those reports followed modestly soft Composite PMI Flash releases in Europe, which were received as slightly dovish.

Bottom line: There were a few less-favorable reports sprinkled into the economic data this month, but for the most part, the widely followed economic releases supported the idea that the Fed is on track to cut rates multiple times between now and the end of the year with an initial cut still being priced in for some time in the summer. Any data that challenges that thesis, such as hot inflation or very strong growth will present a risk to the 2024 rally.

COMMODITIES, CURRENCIES & BONDS

SPECIAL REPORTS FOR ADVANCED RENDERS

What Is the Bitcoin 'Halving?'

Our investment committee does not focus a lot on Bitcoin for numerous reasons... However, the approval of the Bitcoin ETFs has changed that, and as such, we will be modestly increasing our Bitcoin analysis... To be clear, please do not take this as an endorsement or opinion on Bitcoin, it is just our team reacting to the changing investing landscape...

Why does this predictable event result in these outsized gains? It is pretty much Economics 101: As supply decreases and demand remains constant (or increases), the only thing left to move is price.

The next halving is projected to take place around April 19-20, 2024. So, if the past is prologue, some of these gains have been driven by halving anticipation, but more is still to come.

What the Fed Decision Means for Markets: Still All About Growth

The Fed decision was essentially "not as hawkish as feared" given the recent firm price data... But if there was a "beneath the surface" take away from the Fed, it is that the major focus for investors right now needs to be on growth and specifically whether growth can hold up...

Bottom line: With Fed policy known and major relief on rates not coming in 2024, we must focus on growth and make sure we see, as early as possible, any evidence of a rollover because if that happens, it is a major problem for this market. And that is exactly what we will be doing for our clients.