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Weekly Market Makers
Last weekend, as my kids played in the park, a fellow dad struck up a conversation. During our talk, he sighed and asked, "Everything feels so expensive these days, doesn't it?" I’ve heard this sentiment frequently, from friends, family and clients who have expressed curiosity about the rising costs of everyday goods and services. While many individuals are feeling the strain on their finances, inflation measures, such as the Consumer Price Index (CPI), appear to be trending downward, showing a rosier economic picture. So why are people feeling the pinch?
The first three weeks of the second quarter have been tough for both equity and bond investors. After a great start to the year, there hasn't been any place for investors to hide in April. The chart below highlights that the three major equity classes, as well as bonds, have all posted negative returns, with Small Caps now down close to 4% for the year.
The Consumer Price Index (CPI) is a measure of goods and services prices across the economy, and a popular gauge of inflation. The headline CPI rose 3.5% in March from a year earlier, which was higher than economists had forecast and an increase from February’s 3.2% reading. The Core CPI, which excludes the volatile food and energy components, also rose more than expected, with medical care and auto insurance boosting the non-housing service prices.
As we move further into 2024, the commercial real estate (CRE) market continues to attract investors’ attention. Often, when the Federal Reserve increases short-term interest rates rapidly, as in this cycle, some aspect of the capital markets or asset class breaks. CRE is the primary suspect for a crisis in this cycle.
During the decade I spent in San Francisco, I had the pleasure of working with a great economist and investor from 2015 to 2019. Those years proved formative for my investing career, and I learned much from my time there. Recently, I have been reminded of an adage of his. After a short period of strong performance, he would exclaim, “We had a good year this month!”, meaning the portfolio returned what we considered a good year's worth of returns in a fraction of the time. Given the robust performance of the stock market over the last several months, I have been reminded of this saying more than a few times.
Would you have believed us if we had told you on January 1 that the S&P 500 would be up nearly 10% year-to-date after last year’s 25% jump?
This week investors shrugged off hotter-than-expected inflation data, one of the most important data inputs for the Fed in deciding its next policy moves. The impact of the Fed aggressively raising rates over the past year has brought inflation down from a whopping 9% in June 2022 to 3% by the end of 2023. The Fed’s ultimate target is 2%. Much like updating a computer, the last bit sometimes takes the longest.
Over the last month, the term Shrinkflation has become more popular in the media. The term was broached by President Biden during a Super Bowl interview earlier this year, but has been gaining traction more recently (see chart below on Google search trends) due to a proposed bill in Congress, as well as Sesame Street’s Cookie Monster complaining on X (formerly Twitter).
By March, our feelings of excitement for a new year have generally worn off and we have settled into our winter routines. The hope of an early spring and longer days are normally what carries us through the season, but this year, more excitement is brewing.
The most prominent news for the markets this week came from semiconductor company Nvidia, as they announced their most recent earnings. Nvidia is at the tip of the spear for the excitement surrounding artificial intelligence investing. The company’s dominant market share in the chips used to train artificial intelligence models and build out artificial intelligence infrastructure has driven exorbitant growth for the company in the last couple of years.