Stock prices continued on their upward journey during the first quarter, motivated by expectations for rising corporate profits and more accommodative monetary policy.  The basic storyline of waning inflation, solid employment and modest economic growth remained intact, helping to maintain a period of relative calm in the capital markets.  The risk of recession has faded from the forecast, which suggests the Federal Reserve may have engineered a coveted “soft landing” in their battle with inflation.

Our economy managed to grow at an annual rate of 3.1 percent, according to the fourth quarter 2023 report.  The combination of low unemployment, wage growth and rising wealth creation from the surge in stock prices all served to boost consumer spending.  Labor force participation rates for people in the 18 to 64 age group has now fully rebounded from the pandemic low of 73 percent to a more productive 77 percent, helping to fill the roughly 275,000 new jobs created each month.  Supply and demand in our economy have reached a better balance, allowing inflation to ease to around three percent.  The long run target rate of two percent inflation desired by the Federal Reserve appears to be on the horizon, and the most recent Fed commentary confirmed their next phase of monetary policy will probably include three reductions in interest rates later this year.  Analysts expect three more rate cuts in 2025.  

Corporate profits have also reached a sweet spot, with anticipated growth of 11 percent this year and another 13 percent forecast for 2025.  The recovery in earnings has been welcome news for shareholders who have enjoyed a strong five months of positive performance in their stock holdings.  While a handful of technology stocks, termed the “magnificent 7,” have dominated the surge in valuations, the broader market has also seen solid gains.  So far this year, the magnificent 7 have gained an oversized 15 percent, and the rest of the 493 companies in the S&P 500 have risen by a combined five percent.  However, even among those vaunted seven stocks, there is widespread disparity in performance, with the top name rocketing upward by 90 percent and the bottom name dropping by more than 30 percent this year.  It remains a risky bet to only focus on the fortunes of one company or even a small group of seven names.

While Wall Street cheers the surging prices of “AI” stocks, consumers may want to hold on to their wallets.  One of the commercial uses for artificial intelligence is the quest to get us to buy more stuff.  Retailers plan to ramp up spending on software to help forecast demand and generate greater online sales.  AI applications can now write emails for marketing campaigns and create more enticing product descriptions for websites.

Japan quietly marked a milestone last month, with the Nikkei 225 stock index reaching a new all-time high and closing above 40,000.  It has taken more than 34 years for the Japanese stock market to recover from a calamitous fall that began in December of 1989.  The decades that followed were marred by economic stagnation and rising government debt.  One of the country’s struggles has been the demographics of its workforce.  Japan’s population tapered off by 2011, then began a steady ongoing decline.  Japan’s experience offers a cautionary tale about rising sovereign debt at a time when populations are shrinking.  Declining birthrates in western nations, including the U.S., will likely pose a demographic headwind to future economic growth.  

The field of Behavioral Economics lost one of its most prominent champions this week with the passing of Daniel Kahneman.  A psychologist by education, Dr. Kahneman won the Nobel Prize in Economics in 2002 for identifying idiosyncrasies in human decision-making.  People tend to make choices based upon predictable cognitive biases.  The fondness with which we recall an event may be different from the event itself, with implications for managing our “future happiness.”  We weigh losses more heavily than gains, yet we are often overly confident when making a choice based on a hunch.  Kahneman and his academic partner, Amos Tversky, produced fascinating insights that have broad implications for economics, finance, law, medicine and government.  

It is nice to report that the capital markets are currently in a good place.  Investors have endured a lot of drama in recent years, and we welcome an opportunity to appreciate the pleasant moments that happen in between bouts of volatility and uncertainty.  As the cherry blossom trees bloom, we are reminded that spring is a wonderful time to reflect on where we are, and where we want to go from here.

We send our very best wishes to you and your family.