07 Apr US Capital Markets – a Compass Reading “Let the Tape Speak for Itself”
US Capital Markets:
The large caps, defined by the S&P 500 index have gained 9. 11% year-to-date while the Small Caps represented by Russell 2000 index was little better and still in the positive zone with a return of 1% only. 80%. Bonds, measure by the Bloomberg US Aggregate Bond Index, are down by 2. fixed income portfolio achieving an average of 59% year-to-date, the hike in interest rates across the yield curve from the beginning of the year.
How are the US economic conditions now, and what is the anticipated road ahead?
US Gross Domestic Product (GDP) is enjoying healthy economic growth in 2024, aided by
low unemployment, inflation-adjusted wage growth, and robust consumer spending.
Goldman Sachs estimates the GDP will grow 2.1% during the year and modestly slow to 1.9%
in 2025. Thus, a US recessionary forecast is not in the cards anytime soon.
As measured by the Personal Consumption Expenditure (core) in March, US inflation is at
2.8% – reflecting slow progress in the US Federal Reserve’s fight to achieve a target rate of
2.0%, notwithstanding its draconian interest rate increases since the spring of 2022.
Stubborn shelter, housing costs, and rising auto insurance premiums hinder its progress.
According to the Department of Labor, US employment remains robust, and the
unemployment rates are currently at a historic low of 3.8%.
As evidenced by the health of the U.S. economic growth, the US Federal Reserve is taking a
“wait and see” approach to its monetary policy and interest rate trajectory. It is currently noncommittal to make rate cuts anytime soon
Market Compass:
In the bond markets, interest rates have risen across the yield curve since the beginning of
the year, and the overly optimistic projections of a Fed pivot to lower interest rates are rapidly
fading.
Although volatile, equity prices have steadily increased since the beginning of the year, aided
by robust corporate earnings estimates. For instance, according to FactSet, analysts are
projecting earnings and revenue growth of 10.9% and 5.1%, respectively, in 2024.
The forward 12-month P/E ratio for the S&P 500 is 20.5. This P/E ratio is above the 5-year
average of 19.1 and the 10-year average of 17.7. Anticipating substantial productivity gains
in years ahead, aided by artificial intelligence and a renaissance in manufacturing in the
United States, markets are adding multiple expansions in equity valuations.
What is the investment strategy now?
The United States enjoys a goldilocks economy with a sustainable GDP growth rate,
moderate inflation (and improving), and a transparent and prudent Fed monetary policy,
enabling corporate investment in productivity-generating capital spending. The Biden
Administration injects massive fiscal stimulus into the economy via its relentless deficit
spending with little control from the US Congress or the capital markets.
This scenario bodes well for corporate earnings for the foreseeable future and, thus, for
equity prices. I suggest overweighting equities in the portfolios while maintaining shortduration fixed-income allocations (depending upon the risk profile of the asset owners
I recommend using dollar-cost-averaging to put available cash in the portfolios to work in US
equity markets (for investors with a minimum three-year investment time horizon). I also
suggest low-cost exchange-traded Funds (ETFs) representing US large and small-cap
equities and equally weighted large-cap funds as securities of choice.
