Q1 2024

April 23, 2024

The S&P 500 roared ahead this past quarter, gaining slightly over 10%. This surge is largely attributed to the continued advancements in Artificial Intelligence, with Nvidia (NVDA), contributing 2.57% to the total gain. Despite market optimism however, economic realities are shifting quickly, and the recent inflation trend has tempered expectations of immediate interest rate cuts.  

The risk associated with suppressing inflation after 12 years of relatively low interest rates may prove to be both complicated and challenging. With the Fed’s restrictive policy well underway, the recent uptick has proven that further progress—from here towards the Federal Reserve’s two percent target—may take the most effort. As consumers become accustomed to higher prices, they in turn expect higher wages to maintain their lifestyles. Higher wage demands then cause rising prices for goods and services, embedding the stickiest form of inflation. Throughout history, these wage-price spirals have spawned the inflation cycles that are the most difficult to tame. 

The Federal Reserve is faced with an evolving set of exogenous economic conditions that impact long-run inflation. Geopolitical tensions continue to mount, and responses call for increased defense spending—contributing to record high budget deficits. Deglobalization (reshoring of industry) calls for higher wages—and the rising prices of goods. Moreover, higher energy costs associated with supply chain disruption drive oil and commodity prices up.  

Given how quickly the ground seems to shift beneath everyone’s feet, we can’t help but think how important it is to focus on the compass, not the weather. The market’s current performance can be tempting to chase. However, the “fear of missing out” can result in impulsive decision making that may not support long term wealth creation.  

It is critical to remain focused on applying a strategy that carefully considers the right collection of factors—healthy balance sheets, strong and growing free cash flows, and proper capital allocation. These companies typically grow at a sustainable pace, prioritize returning capital to shareholders through dividends and share repurchases, and exhibit financial strength.   

At the same time, investors must also recognize that risk is an inseparable part of the investing process, and that some degree of loss is inevitable. Consequently, success isn’t characterized by achieving an unblemished record of gains or from unabashedly following market trends. Instead, it emerges from applying a thoughtful, balanced strategy that includes managing significant wins while also accepting and mitigating losses. This requires discipline and patience, but this practice—along with robust risk controls—is the cornerstone of sustainable wealth creation. After all, history has shown that the best money managers aren’t impetuously influenced by the changing winds of the market. 

We remain grateful for the confidence you have placed in us and are happy to answer any questions you have.  

Sincerely,

Janet Wills

Adam Mehrer