Stride Bank, N.A.’s Post

Transcript

Looking back at the first quarter of 2024, our theme for this quarter's update is high expectations. And I think that summarizes capital market environment and and the progress the capital markets have made over the first quarter of 2024. The S&P 500 return 10 1/2%. On the back of a stronger economy with the expectations of rate cuts. The paradox of expectations, however, is trying to answer a simple question, which is our expectations, good or bad? Too high expectations can lead to disappointment, while too low of expectations can lead to unrealized potential. And that's what investors have to wrestle with as we enter the remainder of 2024 with regards to rate cuts to economic health and stability to asset valuations. Forward-looking returns and that's what our team looks to focus on for this quarterly update. Today's market expectations are relatively robust. Recession forecasts have all but disappeared. The S&P 500 earnings moving forward are expected to grow by 9% in 2024 and another 13% in 2025, all in the back of hire for longer. Interest rates also hitting headlines today and and investors are asking the question is this a bubble and is this a bubble similar to the technology bubble that we saw in 99 and 2000. Valuations are certainly. Expanded today in multiples of certainly widened out from evaluation standpoint, but there are stark differences between 2000 and that environment versus today and it's primarily driven by the fundamentals of these companies. So if you look at profitability, margins, balance sheet, health, earnings growth and stability, all of these things are are drastically different today for these seven companies being Google, Microsoft, Meta, Apple, Tesla and NVIDIA. The fundamentals of these companies are are are drastically different from 99 two thousand which was much weaker fundamentally. So to answer that question. Today's looks much less like a bubble than it did in 1999 and 2000, even though valuations are certainly expanded. What does that mean for investors today? The concentration of these seven individual stocks, these seven companies within the the S&P 500 index at the index level, that concentration risk is becoming real. But that also provides opportunity for the 493 other names within the index. And that that's really where our team focuses our time is finding those opportunities in the maybe unloved or or less less headline driven companies for our client portfolios and it's really a a point. Of our one of our key tenants in our investment philosophy which is careful security selection and I think now more than ever certainly than we've seen in quite some time, the opportunity set for these underlying companies, the 493 stocks is has a better opportunity set for forward returns than we've seen in quite some time. The bottom line for inflation is that the the last mile so to speak will likely be tougher than than coming from 9% to 2%. And that's what the feds fighting right now. But they do want to get to that 2% with a with a lower fed funds rate, a less restrictive monetary policy. But inflation is only 1/2 of the the feds dual mandate. The other half is labor market and a healthy healthy employment market and we're starting to see signs of easing and cooling and labor market as well. The quit rate is is down. Quit number of quits are down. For employees who over the past two years have left, an employer had to go to another one generally for a better opportunity. A higher wage for example, and higher wages can lead to higher spending, which can lead to further inflation. And so the Fed wants to do cool the labor market without driving unemployment rate significantly higher, ultimately leading to a recession. And so far that's been the case. Unemployment has ticked up slightly to about 4.8. Percent, but still very, very low. Lower than historical averages. As we enter the rest of 2024, I think it's important for investors and market participants to recalibrate their expectations of forward risk and return of their of their investment portfolio and of their investment strategy. As asset valuations change and we enter different parts of the economic cycle, our job is to help you recalibrate those expectations and be realistic about those portfolio return and risk assumptions on a forward-looking basis and today with asset valuations. Wider and multiples having grown assets are more expensive as a result of a healthy economy and high expectations moving forward for what the economy is expected to do. But that also leads to forward-looking returns likely coming down and and really being more more reasonable with our our expectations moving forward. The the annualized return of 15% for the S&P 500 over the past decade may not be the case for the next decade and it's important to recalibrate. The line of thinking.