The U.S. equity markets extended the late 2023 rally through 2024’s first quarter. For only the fourth time this millennium, the S&P 500 index return exceeded 8% over the first three months of the year.
The increase in share price values well exceeded operating earnings growth of the index companies, leading to a significant increase in most valuation measures. Stocks currently trade at 21x forward earnings expectations, which is in the most expensive decile of historic valuations. Other measurements of financial market risk, like the credit spread over Treasury yields demanded by lenders to underwrite risky loans, are at extremely low levels. This indicates a high level of risk tolerance on the part of fixed income investors.
One interesting aspect of the steady increase in equity market returns is that investors are still anticipating Federal Reserve bank rate cuts over the rest of the year. Fed Chairman Powell has—appropriately in our view—sought to tamp down the market’s near-term expectations of rate relief. Recently reported economic and jobs data have thus far validated Powell’s patient approach.
In our lengthy experience, Fairview’s equity returns tend to lag the equity index performance when riskier assets are leading the market forward. Eventually, investor preferences transition away from the fastest growing companies and back toward higher quality, reasonably valued companies favored by our research and security selection process. While we can’t project when this market rotation will occur, we prefer to err on the side of caution and patience.
We are taking advantage of the opportunities to add to existing positions where corporate operating results have well outpaced underlying share price performance. We don’t expect high turnover in our portfolios, but we will take advantage of opportunities to add or trim positions as market volatility ebbs and flows.
The current market environment remains challenging given the uncertainties regarding the global economic and political environment, the continued wars in the Ukraine and Middle East, and the increasingly aggressive posture taken by China regarding Taiwan. We anticipate this uncertainty could escalate as we progress through an already fractious election season. We will be closely monitoring these events and the impact they might have on the broader financial markets.
The information contained in this communication is provided for general purposes only, and was prepared in reliance on independent, third-party sources that Fairview Capital Investment Management, LLC (“Fairview Capital”), an SEC-registered investment adviser, believes are reliable. Nevertheless, Fairview Capital does not guarantee its accuracy or timeliness of any information provided herein. The information reflects subjective judgments, assumptions and Fairview Capital’s opinion on the date made and may change without notice; Fairview Capital is not obligated to update this information. Nothing in this communication should be construed as investment or tax advice, a solicitation, offer, or recommendation, to buy or sell any security. Investment management services are offered only pursuant to a written investment management agreement, which investors are urged to carefully read and consider in determining whether such agreement is suitable for their individual needs and circumstances. The information in this communication should not be construed as an endorsement, recommendation or sponsorship of any company or security. If this post mentions a specific investment or security, we or our affiliates may have a position in that security (either long or short), and we may profit from a price change in that security.
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