The first quarter is in the books, and it was an excellent one for stocks. The S&P 500 index rode a resilient U.S. economy, easing inflation, rising corporate profits, and anticipation of summertime rate cuts from the Federal Reserve (Fed). The positive momentum from the start of the year has continued into March, notching the fifth straight winning month for the S&P 500, and the best first quarter since 2019.
As we focus on the next few months, recent data suggests the economy is still growing steadily and inflation pressures continue to ease. Furthermore, corporate investment in artificial intelligence — still in the early innings — is giving corporate profits a boost and looks more like the early-internet period of the mid-1990s than the speculative bubble in 1999–2000. Double-digit gains in S&P 500 companies’ profits this year, which seemed like a long shot at the start of the year, now seems a distinct possibility.
History generally favors maintaining your allocation to stocks, to the degree your time horizon and tolerance for risk permits it. Since 1950, the S&P 500 has risen 93% of the time in the 12 months following a five-month streak, with an average gain of over 12%. And down years are rare after strong first quarters. That being said, stocks are due for a pullback, as the choppy start to April suggests.
Technology stocks showed signs of fatigue in March, while cyclical value stocks that benefit from the improved economy picked up the slack. This rotation helped the energy, financials, and industrials sectors outperform in March while the average stock beat the index, indicative of widening breadth in market participation.
Turning to bonds, yields remain attractive following the latest rise in rates. A gradually slowing economy and easing inflation should limit additional selling pressure in the bond market, especially if the Fed cuts rates this summer as expected.
Solid fundamentals and history suggest investors stay the course, however we continue to monitor inflation, interest rates, and geopolitics for signs of a shifting tide. As we’ve learned many times in the past, sometimes things can change quickly and without warning so it behooves us to always remain vigilant, even during periods of relative calm.
As always, please reach out to me with questions.
Sincerely,
Bryan Foronjy, CFP®
Founder and Principal Wealth Manager
Foronjy Financial
CA Insurance Lic. # 0F84170
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