Stocks posted a strong first quarter, with the S&P 500 market-cap weighted index returning 10.6%. The S&P 500 equal-weighted index gained 7.9%, demonstrating broad-based gains across individual stocks. AI-related stocks continued to lead the rest of the market.
The Federal Reserve decided to maintain the benchmark interest rate range of 5.25%-5.5% at their March meeting. The last rate hike occurred in August of last year. Fed officials’ forward-looking projections show they expect to set the benchmark range at 4.5%-4.75% at the end of the year. This projection was unchanged despite inflation stubbornly holding above their 2% target and no longer trending down in recent months. Fed Chairman Jerome Powell remarked that a decision on slowing the reduction of the Fed’s balance sheet is coming soon. These actions amount to a Fed preparing to remove its foot off the brake on the economy, which markets tend to view favorably.
On the fiscal policy side, a multi-year shift continues to play out. 2020 and 2021 saw outsized support for the consumer/demand-side of the economy in the form of stimulus checks and expanded unemployment benefits. Infrastructure, climate, and semiconductor legislation followed, providing extensive tax incentives and grants to corporations on the supply side of the economy. This supply-side stimulus is still accelerating. Non-residential construction spending climbed 36% in the last two years, led by manufacturing (+130%) and highways/streets (+41%). Recent AI advances are also significantly boosting data center investment. In the years ahead it will be important for the economy and many stocks to see these investments deliver economic returns. Long-term economic growth is hindered by bad investments and boosted by good ones.
The S&P 500 has staged a big rally in the last 12-18 months, breaking out to new all-time highs. Earnings growth has been modest over the same period, leading to higher valuations. Of course, this is not the case for all stocks and portfolios. Higher starting valuations result in lower future returns, all else being equal. A common pitfall for investors is naively extrapolating recent returns. The pain of recent losses causes them to cut risk and sell in a down market and they chase the hottest, riskiest investments for fear of missing out. We continue to feel a consistent and disciplined approach is best in the long run.
Jared J. Ruxer, CFA, MS