1Q24 Investment Markets Review
This post is a review of investment markets for Q1 of 2024. You will find our thoughts on the market, what we are doing in investment portfolios as a result, and a few deeper dive resources.
The stock market had a strong first quarter, continuing the strong performance from the 4th quarter of 2023. The bond market was flat to down a bit.
In January, the S&P 500 (A US-market mix of 500 stocks) finally moved past its previous December 2021 high. It took a little more than two years. Or did it? If the impact of inflation in considered, the S&P 500 had not yet surpassed the previous high (as of March 31). Close, but no cigar as of March 31, 2024. Those observations support the idea of “time frames” when thinking about investing in the stock market. That is, to only invest money in the stock market when your need for that money is further away than the expected “market recovery time.” In other words, money you need in the short-term is not a good candidate for stock market investing.
To read more about our thoughts on the state of the markets and inflation see “John’s Thoughts” below the market reports.
Happy Spring everyone!
The US market has performed very well recently. We are reviewing client portfolios to ensure that global allocations are right, such that our clients (and our money!) is not overly exposed to the US market. For some portfolios, re-balances are warranted.
If you are an investment management client of TrailFP, we will contact you with details about our review of your portfolio and any actions taken as a result.
The rest of this message includes links to a written review of market performance and John’s audio tour of the report.
Detailed Market Performance – a watch
The following link is a 1-minute audio tour of some of our observations of what has happened recently in the markets. Some people prefer a guided tour over a read. But, the tour will be too fast to read!
The investment market performance report is prepared by Dimensional Fund Advisors (DFA), one of our partners in investment management and client support. If you would like to find out more about DFA, you can visit their website directly at: https://www.dimensional.com/
Detailed Market Performance – a read
To view a detailed analysis of investment performance in the US and global stock and bond markets, click on the button below.
Market Valuation and Inflation – John’s Thoughts
Value is a lovely word. It incorporates two ideas – cost and benefit. The value of something is the answer to the question,
What do we receive in exchange for the cost?
Value can be a useful way to consider seemingly disparate things. What is the value of a new car vs. a used car? A new car costs more than used, but also provides more – more features, more life before breakage. An attorney’s time may cost a lot, but the value of their advice on legal matters is likely better than what you will get from Google.
Valuation within investing is the act of assigning a value to investments. What do you get, and what does it cost? Sometimes the benefits and costs become disconnected, such as what happened to the meme stocks like GameStop a few years ago or Truth Social right now. If you want to watch a highly entertaining movie about those events check out “Dumb Money.”
Valuation for stocks and bonds is a gigantic topic, more complex than trying to decode why the Barbie movie wasn’t nominated for a best picture Oscar (actually, that may be simple). I won’t go deep into valuation, but I want to talk about one consideration of value within investing – how your investments interact with inflation.
If we simply looked at price, the US stock market (S&P 500) surpassed its previous high from Dec 2021 in Jan 2024. It took a bit more than two years. However, if we factor in inflation, which erodes value over time, it was not until April 2024 that the S&P500 surpassed that Jan 2024. To look at this data for yourself, check out the links at the bottom of this post.
The difference in time (a few extra months) may seem a small point, but consider that the US stock market was up by +10% in the first quarter alone, an extraordinary growth rate. It took all of that growth to overcome the hidden drag of inflation since Dec 2021. (Note – this is a simplistic analysis, inflation occurred over the entire period, and we should really say that the 10% loss of value due to inflation was spread over the 2+ years, not just concentrated in 3 months). The point is, that inflation is a drag against long-term returns.
So, how should we think about the impact of inflation on our investments? I believe that inflation is real and will continue to occur. Hopefully not as high as we’ve experienced over the past year or so, but I believe it will persist. One of the primary reasons to invest for the long-term is to stay ahead of inflation. What is the best way to do so?
Find an investment that has an inherent rationale, or mechanism, for staying ahead of inflation.
Does cash have such a mechanism? No.
Do high-yield savings accounts have such a mechanism? No.
Does gold have such a mechanism? Maybe. Popular opinion says that it does, but the price of gold is a predominantly a popularity contest. The price goes up with demand (and supply). So, if everyone thinks that gold is a hedge, then it may become a self-fulfilling prophecy. However, I do not consider a rationale of “everyone thinks” to be a mechanism.
Do bonds have a mechanism against inflation? Inflation-protected bonds in which you trust the government’s promise to keep yields at inflation do. The government’s promise has been trustworthy, so I am not dismissing this. Most bonds do not have any mechanism to protect against inflation.
Does real estate have a mechanism against inflation? Sort of. Real estate prices have grown with inflation, and perhaps you could make an argument that prices are connected to rents, and rents tend to rise with inflation. That is a mechanism.
Do stocks have a mechanism against inflation? Yes. Why you might ask?
Companies have to pay for labor and materials that go up with inflation. Those companies set prices to keep ahead of their costs. Profits are what remains after price – costs. Strong businesses aim for profits. Stock-based investments, over time, track the progress of company profits. Thus, we expect stock investments to out-pace inflation.
There are many investments that could be considered for long-term returns for your hard-earned dollars: high-yield savings accounts, bonds, real estate, gold, bitcoin, pork belly futures, leveraged ETFs based on the hot NVIDIA stock. Each of those investments has its own merits and drawbacks. However, none of them has a “baked-in reason” to outperform inflation over long periods of time.
If one of the primary values of an investment is to “make sure I can pay for my life in the future,” then I remain confident that stocks still provide one of the best values for your hard-earned dollars that you wish your future self to have access to.
Disclosures and end notes
Information contained within is generalized information about investing and the investment markets. It should not be considered investment advice, personalized or otherwise. Past investment performance is not a guarantee of future investment performance. Investing in markets comes with an inherent risk of losing money.
End Notes
Information on the performance of the S&P 500 over time can be found everywhere. Information about how inflation impacts those returns is little less common. I like to look at the excellent website maintained by Nobel prize winning economist Robert Shiller. Here is a link:
www.multpl.com
Mr. Shiller has no affiliation with Trail Financial Planning, and nothing that is presented in this blogpost or on the www.trailfp.com website has been reviewed, commented on or endorsed by Mr. Shiller.
