Broker Check
First Quarter 2024- What Happened?

First Quarter 2024- What Happened?

April 09, 2024

Interest rates rose throughout most of 2023, but then dropped significantly in November and December. At the end of the 2023, the 10-year US Treasury was quoted at a 3.85% yield, and most economists and market professionals were looking for 6-7 interest rate cuts from the Federal Reserve in 2024 and most likely a recession in 2024.

We were very skeptical of this forecast. Most of our clients were positioned in shorter duration assets, and we did not accept the idea that the US economy would slow significantly and a recession would ensue. With an inverted yield curve, shorter duration assets were yielding more than longer duration assets but were not in a position to benefit from increasing in price if and when interest rates dropped.

So what did happen in the first quarter of 2024?

The US economy stayed strong: positive GDP growth, strong employment growth, strong retail sales and consumer spending and strong housing activity. By quarter end, the calls for recession which were at a 60-70% probability at the beginning of the quarter, are now almost nonexistent. Inflation has slowed, but it has been staying higher than the Federal Reserve would have hoped and higher than many would have thought based on higher borrowing rates for Treasury bonds, mortgages, consumer loans and car loans.

Every economic textbook will tell you that higher interest rates are a drag on economic activity. But the current case for the US economy may be that higher rates are forcing substantially higher fiscal deficits, and thus may actually be stimulative to the US economy on a net basis. With a 34 trillion dollar national debt and growing by 2-3 trillion per year, higher interest payments are forcing more money into an already strong US economy muting the drag effect that higher interest rates have historically had.

Enough of the economic mumbo-jumbo, how did our client investments perform?

Our clients had a vast outperformance to peers in Q1 based on our fixed income positioning. In the first quarter, treasury bonds and lower risk longer duration assets had mid single digit NEGATIVE total returns. Our client portfolios of short duration, floating rate, municipal, credit opportunity and high yield bonds had roughly positive 1-3% total returns. This is an astounding outperformance.

The first quarter ended with the 10 year Treasury yield UP roughly 50 basis points from year end to 4.40% as the economy stayed strong. The Federal Reserve who economists thought would start cutting rates as early as March have been on hold as they wait for the economy to weaken and inflation to fall closer to their 2% target.

What do we see for the second quarter?

Always hard to say, but we are staying the course with where our investments are positioned: short duration funds and taking little interest rate risk. Short duration, floating rate, high yield and credit opportunity funds take a little more credit risk, but with the stronger economy, companies are in a strong cash flow position to service and pay down debt.

As we have previously noted, we have a consistent weekly dialog with our fund partners from Lord Abbett, Nuveen, Blackrock and Invesco who keep us up to date on all current and prospective economic outlooks.

For people with assets to invest, higher interest rates are a very good thing. While we took some NAV declines in 2022 as rates rose substantially, longer term, total returns will be far higher with interest rates where they are right now as opposed to the last decade of near zero percent interest rates.

We will be watching economic data closely to see if the US economy starts to slow and whether interest rate cuts are coming at which time we will likely get repositioned.

As usual, we take our rising income, and we continue to be long term investors. Our approach to investing is always thoughtful, calm and focused on value.

Our best wishes for a happy and joyful Spring Season!