Rally or Reckoning?
April 2024 - The first quarter of 2024 was a strong start to the year, following the strong fourth quarter of 2023. The tech stock rally of 2023 fueled by AI broadened to include many sectors that directly or indirectly benefit from the new AI economy. This rally continued through the first quarter of 2024, begging the question “How long can this last?” In the first quarter, the S&P 500 index was up 10.2%, small-cap stocks were up 4.8% and International Developed markets were up 4.9%. The U.S. markets had greater returns partially due to the adoption of AI technology and the strong performance of related companies.
Bond markets have been whiplashed due to the early predictions that the FED would make six to seven interest rate cuts this year, beginning as early as March. Bond prices assumed these rate cuts would occur, and when they didn’t, bond prices adjusted. Today, the 10-Year Treasury is maintaining a yield of about 4.35%.
Now it is apparent that the FED may only make one or two rate decreases this year, and those depend on how the data reflects the inflation rate and employment level. Make no mistake, the FED is in control of the financial markets by having control of interest rates. The bottom line: Wall Street wants an interest rate cut, but the FED isn’t sure the economy needs one yet. There is a published percentage of probability the FED will or will not cut rates before each FED meeting. Right now, there is a 60% chance the FED will reduce rates by June. Current projections for 2024 are three to four rate cuts. The interest rate forecast by FED officials for the end of 2024 is 4.625%, which is .75% lower than it is today. The rate expectation for the end of 2025 is 3.625%. This means that the FED will eventually have to lower rates, but when that begins is still unknown.
The market’s anticipation of FED moves will toss the financial markets around until a rate reduction program is started. This one factor will add significant volatility to the markets. We also have several other factors that will add to volatility, at least in the near future. China’s economy was down 5.2% in 2023 and continues to show weakness. This is affecting global commodity prices. On January 29, the High Court in Hong Kong ordered the winding up of Evergrande Group, the world’s most indebted real estate developer. The company filed for bankruptcy in New York late last June. Their debt is $333 Billion. Overseas debt is $25 Billion. This will resonate in the real estate sector for months to come, and the impact will be felt in China for years to come. Other contributors to volatility this year will be the wars in Ukraine and Palestine. These have become highly political and have resulted in demonstrations across the globe.
Japan is contributing on the positive side of the equation. For decades, Japan has had a contrarian monetary policy with negative interest rates. Their Central Bank has maintained the most liberal policy for government purchases, including corporate bonds, stocks, and real estate. Japan is expected to end the only remaining negative interest rate policy remaining on Earth. They have the third largest bond market in the world and their stock market just hit a 34-year record high. Brokerage firms in Tokyo are staffing up and this should be a record year for their financial markets.
Another disrupter this year will be cryptocurrencies. Yet, with the continued devaluation of the dollar and more focus on cashless transactions, the crypto bulls are running. Although this might seem strange, we should see the unveiling of a digital dollar in the near future. As crazy as that might seem, we believe it will happen and has been in the planning for a long time. The major difference between a dollar and a bitcoin is what supports its value. The dollar used to be pegged to gold but is now backed by the “full faith and credit of the U.S. government.” What exactly is that? It boils down to the ability of the government to collect and/or raise our taxes, when necessary, to pay its debts. Although there is not yet a major credit vendor like Visa or Master Card that facilitates transactions with Crypto Currencies, that issue will be solved with the new blockchain technology. Until there is an asset that backs the value of any Crypto Currency, their value is based only on speculation, supply and demand. This obviously adds to their volatility.
Speaking of our government debt, taxes, and volatility. The U.S. debt crossed the $34 Trillion mark as of January 4th this year. This level is “permanent” in that we have not and will not be able to reduce the debt without drastic measures put in place. Our debt is now increasing by $1 Trillion about every 100 days. The rate of our debt increase has accelerated in just the last few years to this level. It was $32 Trillion in June of 2023 and $33 Trillion in September of 2023. Before now, the debt took about eight months to grow by another trillion dollars. That is down now to 100 days. When we look at all the things that bring volatility and uncertainty to the financial markets, this is the most significant. The single largest risk to us is that we are asleep financially. When we finally wake up and realize we cannot continue to spend money we don’t have as a nation, for whatever reason, then we can begin to reduce our debt and this risk to everyone.
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Financial Management, Inc. is a CEFEX®-certified Registered Investment Advisor