First-quarter 2024 market review with Jim Smigiel

Hi, I'm Jim Smigiel, SEI's Chief Investment Officer. As we welcome the arrival of Spring, I find myself focusing on new beginnings, or maybe better yet, starting points. Starting points matter of course in life and business and in markets. And with this in mind, I'd like to reflect on a few starting points as we embark on the second quarter of 2024. 

Firstly, U.S. equity investors are starting from what can only be described as elevated levels. The S&P 500 index currently trades at a forward price to earnings ratio of 21 times. That is well above historical averages of roughly 16 times and a good distance away from the rest of the world, which trades at just under 14 times. While it is true that equity performance has broadened out thus far in 2024, for example, Japanese equities are enjoying a strong rally and the Magnificent Seven are ending their run in favor of maybe the Fab Four. Still quite a bit of good news remains priced into the US market. 

Starting from here, the bar has been set fairly high for earnings to outperform expectations and drive prices higher. PE multiples can still, however, expand from these heights, particularly if they're helped along by interest rate cuts from the Federal Reserve. 

Speaking of the Fed, the second quarter of 2024, we'll most likely see the start of new interest rate cycles from global central banks. A recession in the core of Europe and a close call in the UK are clear reasons to consider rate cuts. While Japan has finally pivoted in the opposite direction, lifting rates for the first time in 17 years, as inflation and economic growth remain relatively strong. Regarding the U.S., policymakers will most likely join Europe and the UK in pivoting to rate cuts in spite of solid growth, historically low unemployment, and stubbornly above target inflation. 

The Federal Reserve seems convinced that the current economic backdrop is perfect starting point for additional monetary stimulus. For our part, we remain unconvinced that pro-cyclical rate cuts are needed in 2024. Debt markets also deserve our attention as well, particularly in the United States as fiscal spending continues, despite some already eye watering metrics. 

U.S. government debt has reached 36 trillion as of December 2023, in excess of 120% of GDP with annual interest costs breaching the $1 trillion mark and that's 1 trillion with a T added to the already bloated debt pile every year just in interest alone. One would think that this would be a good starting point for discussing some fiscal discipline, although the pending election makes that highly unlikely. What is certain is that there will be no shortage of supply in government debt. So the question is, will there be enough demand? 

Looking forward, we continue to prefer a more diversified equity posture relative to many developed markets. We seek to achieve this diversification via our preferred focus on high quality companies with positive earnings momentum at reasonable valuations. We retain a slight preference for value names in the United States, particularly in large cap, and a modest emphasis on value and momentum across our broader equity complex. In general, this leaves us with a preference for financials, industrials, and consumer discretionary names. 

On another note, we're also paying some attention to passive investors who, by the nature of the strategy, are really buyers at any price. For those investors with exclusively passive exposure in U.S. large cap stocks, we think the second quarter could be a good starting point to add some active management. We expect an easing in the concentrated nature of the market index, which tends to act as a tailwind for active managers. 

It's also worth noting that multiple rate cuts remain priced into equity markets across the globe. Therefore, any disappointment in these stimulus measures could prove challenging. However, equities have been resilient thus far this year as rate cut expectations in the U.S. have already been reduced by half. We believe that the level of interest rates will be more important than the number of cuts. In other words, if the U.S. 10 year treasury yield revisits 5%, equities may struggle. On that point, in the United States, specifically, we see stubborn inflation, firming growth, and low unemployment, and as I mentioned, a deluge of supply, putting upward pressure on bond yields, and we do continue to expect higher long-term rates in 2024. 

Lastly, we also remain positive on commodities as the asset class should benefit from positive global growth and the continued discipline production in the energy complex, as well as strong demand in precious metals. As always, thanks for watching and for your continued support.