2024 Q1 Market Commentary
Markets & EconomyHere's our take on what happened in the markets in the first quarter of 2024.
Clayton Johnson 1:05 Hi, I'm Clayton Johnson with Squire Wealth Advisors and today I have with me Wayne Barben, who's also from Squire Wealth Advisors. Wayne, thanks for joining me.
Wayne Barben 1:18 Happy to be here, thanks Clayton.
Clayton Johnson 1:20 Yeah. So we wanted to spend a few minutes to just talk about what happened in Q1 of 2024 in the markets and just offer our perspective. So waiting to get us started out, can you just tell us a little about what happened this last quarter, how the markets did and and what that means for investors?
Wayne Barben 1:37 Yeah, was actually a fantastic quarter for the markets. If you're looking at at growth right just about all areas of the equity market were up to 1 degree or another. So we were really happy with that. Yeah, like most years or most quarters and years, we saw some fluctuations in different asset classes. Some areas did better than others, and that's fairly typical. If we look at how well U.S. Stocks did. That's mostly on the large growth area. They did tremendously well. That was almost up 10%. Uh. And so we saw some really good growth there, international emerging markets where all up as well, I'm lagging behind, but still positive. We're small and small value. Historically, that hasn't been the case. But anyway, just happens to. The market tends to. Go up, but not every asset class at the same pace. And so that's what we saw this quarter. A lot of that had to do with the hope. I think that is there that as inflation ABS a little bit, it's come down significantly from the highs that it was at. We're seeing that there's the idea, at least, that they'll start lowering interest rates soon, and that's what's kind of keeping the market from continually continuing to ascend is that concern that they, the economy still doing well enough and there's still some inflationary pressures that we really aren't going to see them lower interest rates for some time. And you'll talk about that a little bit later with the bond market potentially.
Clayton Johnson 3:22 Yeah. And one thing I'll I'll point out too. And as you mentioned, large growth led the way in, in this quarter at about 11.4% in large growth.
Wayne Barben 3:31 Yeah, it's fantastic.
Clayton Johnson 3:32 Umm, it's great. You know, we're not complaining about great performance like that. We we adhere to a philosophy that we we tilt towards small value often our portfolios. So we're always looking for when that premium shows up at roughly 2.9% about 3% this quarter, which is still good just relative to large growth.
Wayne Barben 3:51 Yeah, I found a fantastic usually.
Clayton Johnson 3:53 Yeah, one one thing I do want to point out about small value is oftentimes that will show up in small blips, right where small value does really well over a short period of time. And if you follow up value investing strategy and a small value investing strategy, it's really important to stay in the market, right, because you can miss those important days when when the markets do recover in small value does exceptionally well.
Wayne Barben 4:12 Yeah, absolutely. Yep.
Clayton Johnson 4:21 So one of the things I do want to also bring up here, what we're we're looking at the slide here about the relative cost of earnings through time. I think this is an important chart to look at and you and I have talked about how this is one of your favorites. Really. And and what? What it means for investors? What it means for our portfolios as far as where things stand in relation to the their PE ratio currently compared to where they are on historical averages. So can you tell us a little about what this this chart is saying, Wayne, and and why that's that's important to understand?
Wayne Barben 4:57 Yeah, you're right, this is probably my favorite chart because I think it tells a great story this quarter. Ohh, if you look at the chart it it compares U.S. Market equity, which is kind of the large growth and large value US small value equity below and and you see those graphs, there's a couple of things to note. One is U.S. Market equities at 21.4 that means price earnings ratio. The price is 21.4 times a dollar of earnings, right? So it takes $21.00 of price for a dollar of earnings as a comparison.
Clayton Johnson 5:37 Real quick, Wayne, just interrupt you for a second. The the chart we're looking at here actually is 23.5. So I think 21.4 was from maybe 1/4 ago. 23.5 is what we're looking at today, but it's the same message.
Wayne Barben 5:48 Well.
Clayton Johnson 5:51 It's the same message. It's the same, same idea.
Wayne Barben 5:53 It is. It's the it's it's, it's the other one. But yeah, so if you look at the US market, the market equity, the US small value equity, it takes a lot less dollars to buy a dollar of earnings in small value as it does to large value. The same is true of international and specifically international small value.
Wayne Barben 6:16 It's only 8 or you know in this graph. Yeah, it's all a lot fewer dollars to buy a dollar of earnings from those companies than it is here in the US.
Clayton Johnson 6:26 You know.
Wayne Barben 6:28 Umm, but more importantly, if you look at the end of that graph you will see that for the large growth it's actually much higher than the mean. The average that it's been right, it's kind of overpriced if you will, if you if you just consider the price to earnings ratio the price compared to the earnings and small value hasn't kept up now over time we expect those to kind of revert back to the mean and so there is a little bit of a hint of maybe that area is a little over inflated and maybe the other one is a little bit Thunder inflated what that tells us is it may be a good time to look at those look back at our portfolios maybe.
Clayton Johnson 6:56 Hmm.
Wayne Barben 7:12 Do some rebalancing. Take some of those that have done well. Not everything, obviously. We wanna stay invested in all areas of the market, all of those asset classes, but to take a small amount of that, that is done so well and reinvested in some of that that we expect to do better in the future as well.
Clayton Johnson 7:32 Yeah. And and that's a great, great .1 of the things that I like to think about is that the investor behavior tied to this point, right? Umm I'm I'm a a frequent purchaser of items on Amazon and one of the nice functions of Amazon. It'll tell you this item that you may be following how the price of that item compares to its historical average. So if I'm following Aqua Djo Cologne and it's on sale right now and it's $20 less than normal, that's an opportunity for me to buy. And that's kind of what we're looking at here too, right? We're charting out the price relative to earnings and its historical average. I'm not going to go buy my product when it's the at its most expensive point. Usually I'm trying to buy things for sale now. I think we all can relate to that. We're all looking for a good bargain on on whatever it is, but for whatever reason, in the investing world, we do the opposite, like innately we do the opposite. And so we have to check ourselves and make sure that we're not doing that. We hear about the mag seven or the best seven companies and we hear about this strategy and it's been doing really well over the last year and it's it's, you know just outperforming and what that means is more money is going into it and it's becoming a more expensive a strategy and its price to earnings may be higher. And so I think we need to check ourselves sometimes when investing, make sure that we're not pursuing what's been doing really well over the last 12 months or the last two years or even the last five years because it may be that the PE ratios higher and as reversion to mean often happens, what that'll impact us negatively going forward so.
Wayne Barben 9:10 Yeah, exactly, exactly.
Clayton Johnson 9:12 Uh, we're going to say something went.
Wayne Barben 9:16 Well, I was just gonna say that, you know, as we look at that, this isn't a I don't know what the future holds, right? We just look back at the times when. Once high and one low and and and you can look through that on those graphs and it's just a time where you've seen that separation where one is below the mean, one is above the mean. I don't know when that's going to change or even if, but that's how we look at that as maybe that's an opportunity to rebalance and just get your portfolio back in line with with where we would expect that to be. Maybe it's an opportunity to sell high and buy low. Time will tell, but we would expect that to be the case.
Clayton Johnson 9:56 Yeah. And then I wanna. I'm just briefly talk about how bonds performed over the last quarter. As you can see on the chart, bond performance was was negative for the quarter. There was a lot of expectation about interest rates dropping from the Fed. That didn't happen. There's an inverse relationship between bond prices and interest rates. As interest rates go up, bond prices go down. So if you hold existing bonds and interest rates are going up, then the value of your bonds are going down on the short end of bonds. So those that you're for a year to three years, there was actually positive return, but long term bonds, those from the 10 to 20 year range, you saw a larger negative performance and that's pretty typical of the bond market. The further out you go on maturity or out on the yield curve, the more the price of the bonds going to fluctuate with changes in interest rates and. And so to transition that to just where we're at with interest rates, we're still in an inverted yield curve right now, although it's less inverted than it was in the past. Even the last quarter, we've seen improvement in the yield curve. There's still expected positive returns in the bond market, and it's improved for the long term bonds as well. So just wanted to highlight a few of those points. When it comes to fixed income, but this last thing that I wanna talk about Wayne and just ask you about is is what we refer to oftentimes as the Skittles chart or the quilt chart or it shows us the diversification of of various various asset classes and how they performed in certain years.
Wayne Barben 11:25 Yeah.
Clayton Johnson 11:35 So why is this important? When we look at our portfolios as a whole and consider what happened this last quarter, for example, why is this important for us as investors to to understand the principles behind this diversification?
Wayne Barben 11:47 I think I I think the best thing we can do is we can look at this chart and realize there is really no rhyme or reason, no statistical way to put this chart together and say if this happens after this, that it really has no rhyme or reason to it, right? It just happens, but this is a review of what has happened over the last 20 years, as far as which asset class performed better in each of those given years and how much it did to the Good or to the bad right. And so as you walk through this graph, what it tells us is oftentimes what was best one year is, if you look at this graph, worst the worst the next year, right? And so you really can't predict what next year or what the return of 2024 will be based on what 2020 threes was.
Wayne Barben 12:42 Ohh it's really gives us I think a really good idea of why diversification is so important, right. If you follow the the white line or the the white squares there, what they will follow is what kind of the average has been, what has 60% equity, 40% fixed income portfolio would be. That's kind of on the moderate to conservative side, right? And it compares it to S&P 500.
Clayton Johnson 13:05 And you.
Wayne Barben 13:08 That's all equity. So you would expect that to be the highest few years ago, so the S&P was not the highest.
Clayton Johnson 13:11 Hmm.
Wayne Barben 13:14 It's just that over the last few years it has been in the top near the top or at the top for five of the last six years. Well, that's brought that average clear up from where it was. If you look back at the beginning of the graph, you can see there's four or five years where it was below the mean, right?
Clayton Johnson 13:28 Yeah. Hmm.
Wayne Barben 13:34 What it really tells us is just to diversify. Have all of the asset classes that will even out some of the volatility that you wouldn't otherwise see and try to get a good.
Clayton Johnson 13:43 Right.
Wayne Barben 13:49 I shouldn't say more stable return, but you'd still get a great return. Specifically, if you were, say, all equity right, but this is a very moderate account that we're tracking in this particular graph. Umm, but we just cannot predict what's going to happen next year based on last year. And So what we wanna try to do is to diversify into all of the asset classes and get that more even keeled return over that time than what we would get.
Clayton Johnson 14:07 Hmm.
Wayne Barben 14:17 You don't get the best return and you obviously don't get the worst return. You get somewhere in between and yet overall your return would be really good during that time frame.
Clayton Johnson 14:26 Yeah, I like to contrast that that white one with like the the darker maroon one that's representing real estate. You can see that dark maroon one had a number of years which the top performing sector asset class, but you also have a number where it's the the bottom performing one as well.
Wayne Barben 14:32 Yeah.
Clayton Johnson 14:44 The white section doesn't have any top performing or any bottom performing, so depending on what you as an investor are trying to accomplish and you're trying to even out the the volatility, then you do some kind of a blend.
Wayne Barben 14:44 Yep.
Clayton Johnson 14:56 If you're just trying to shoot for the moon and and get the most return possible, well, it's 6040. Portfolio may not be right for you. We're not advocating or recommending any specific portfolio to people. Just to be clear on this call, we're just emphasizing that there's opportunity for diversification to minimize your risk and and you just never know what the next year's gonna hold as far as which has to class. So our our philosophy, what we often recommend is it's best to hold a large basket of stocks of sectors of countries, get a whole global portfolio because then you can capture those positive returns when they happen, wherever they happen.
Wayne Barben 15:19 Yeah.
Clayton Johnson 15:35 We just never know, right so well, we'll Wayne.
Wayne Barben 15:37 Yep.
Clayton Johnson 15:39 I appreciate you joining me on this call and and answering some questions about how the quarter went. So thank you so much, Wayne.
Wayne Barben- Oh no, happy too. It's been fun. Thank you, Clayton