Executive Summary:
- Financial Markets Were Led by Strong Equities in the First Quarter, Benefitting Thayer Client Accounts
- The Federal Reserve is Still Contending with Whether and When to Cut Policy Rates
- AI Continues to Inspire Investors, but also Brings Electricity Usage Concerns
- Intensifying Electoral Discourse Will Shine Brighter Lights on Fiscal and Trade Policy
- Thayer Client Portfolios are Holding Their Positions, Maintaining Broad Diversification Across Equity and Credit Instruments
1. What Happened in 2024’s First Quarter?
With healthy economic conditions persisting, and recession worries pushed farther out on the horizon, stocks carried their late 2023 strength through 2024’s first quarter, leading to their best start since 2019. This benefited Thayer client portfolios, which began the year fully weighted to equities.
The S&P 500 rose 10.4%, while the globally inclusive ACWI gained 8.2%. The NASDAQ was up 9.1%, participating well while not dominating as had been the case in 2023. Equities showed more breadth as perceptions about the economic landscape improved, the latter accruing to the benefit of our position in small/mid capitalization stocks (up 9.9%). The Thayer equity mix also was helped by a slight bias toward U.S. exposure while also equal-weighting Japan, which surged 20.6%, helped by strength in the technology sector. Meanwhile, the equity mix was slightly hindered by its dividend-paying stocks, whose gains were more in the 7% neighborhood.
The resilient economy created headwinds for bond markets. Rates had dropped, and prices risen, over the last ten weeks of 2023 on benign inflation readings and expected economic deceleration, with Federal Reserve chair Jerome Powell more overtly indicating a pivot to rate cuts in 2024. However, pivot hopes ran into stickier (3%+) CPI inflation reports for January and February. This pushed out hopes for a first rate cut off the current 5.25-5.50% level from the March or May Fed meetings to the summer editions or beyond. The AGG bond index thus shed 0.7%, with longer maturities falling a bit more and shorter a bit less. The Thayer bond mix held up relatively well as it remained shorter than the benchmark, notwithstanding a modest lengthening trade three months ago.
2. Did the Federal Reserve Jump the Gun in its Pivot Messaging?
The Fed and investment community alike are grappling with where inflation is headed, along with perceived trends in consumer spirits and behavior. Price stability is half of the bank’s dual mandate, with full employment being the other. (Most of the other main central banks in the world are by charter concerned only with the first.) Normally, rate cuts would be perceived as necessary with benign inflation as well as significant erosion in employment. The first isn’t quite true and the second definitely is not: unemployment remains near 50-year lows at just under 4%. Workers also have enjoyed solid (4%+) wage gains; these could well prove to be the stickiest inflation component, and they are a key input in corporate costs, which get passed along in higher prices.
The Fed has the luxury of an economic environment that doesn’t seem to need any course correction, and this has fortified the “no hurry” message which Powell and other FOMC members have put forward more recently. And another significant variable will loom ever larger as we enter the year’s second half: the November election. The Fed is definitionally independent and apolitical, but any cut or cuts within a few months of the election (meaning the late July and late September meetings, with November’s just after the vote) could be questioned as being politically expedient for the incumbent president. On this landscape, investor emotions could follow a path that is indeed more spirited than usual.
3. Is Artificial intelligence Due for a Reality Check?
Stocks and investor optimism continue to be supported by the Artificial Intelligence theme, and AI chipmaker Nvidea has been a bellwether and Fab 7 leader in early 2024 just as it was in 2023 (surging 82.5% in the first quarter on top of 2023’s 239.0% gain). But there has been some reality checking in at least its early stages. Societal and worker viability concerns already have been worked through. Most agree that any losses of jobs where AI can more efficiently replace a function would be more than offset by promising new job frontiers along with enhanced productivity. More recently, however, we’re seeing a greater recognition of another key issue: energy usage and related environmental impact.
As we attempt to shift from gas-powered cars to EVs, tap AI in the interest of efficiency and innovation, and create new currencies like bitcoin, there are big shifts in how we utilize resources. All three are adding measurably to demands on our electricity grid, and trends are sharply upward. AI alone requires massive amounts of computer generating power, stressing fossil fuel as well as water resources. Data centers today account for 4% of U.S. electricity consumption, and this number is expected to move up to 6% in only two years, with demand continuing to increase by 13-15% annually up to and likely beyond 2030 (sources: The Wall Street Journal, McKinsey Group, investment writer John Mauldin). Clearly, as a society and an energy economy, we will have big decisions to make.
4. How is the Upcoming Election Shaping the Policy Outlook?
Moving into the summer conventions, policy and platform gaming will have a greater impact on investor consciousness, including, along with immigration and social issues, some key economic ones as well. Our fiscal approach, for one, has been for a couple of years upstaged by the monetary side of the policy mix, with all eyes on the Fed. But in a higher rate environment, bringing far higher debt service costs, government spending and borrowing represent a greater issue, and potential burden.
To this end, Biden unveiled a fiscal 2025 budget of $7.3 trillion, above President Trump’s COVID-driven $6.8 trillion, and a far cry from the days late in the Obama administration when $4 trillion was first breached. This sticker shock will be joined in the campaign discourse by whether to extend the 2017 Trump tax cuts next year. The Congressional Budget Office has tallied that the ten-year cost of an extension would be $3.5 trillion, as against today’s running national debt total of $34.6 trillion. But even if Biden wins, unwinding the cuts might be difficult in the new Congress.
Another area is tariff policy, now at a time when the Chinese export economy seems to be newly ascendant and price-competitive, no better symbolized than by EVs priced at around $13,000. Trump has vowed to thwart any sale of these cars in the U.S., threatening tariffs on the order of 100%, and is indicating steep new tariffs more broadly. However, today’s inflation sensitivity compared to Trump’s first term might make a new protectionist program politically challenging. Biden kept Trump’s earlier round of tariffs essentially in place, but now may want to put forward inflation relief, possibly paired with tariff relief, as campaign promises.
5. Are There any Changes in Thayer Portfolio Positioning?
Entering the second quarter, we are holding portfolio holdings in place. Client accounts are well diversified, participating broadly in the markets while carrying some defense through that diversification. While U.S. stocks arguably are fully valued, non-U.S. exposure is significantly cheaper. If not today, at some imminent point it might make sense to upweight emerging markets, which carry steep discounts and may benefit from a China-led resurgence. Meanwhile, the bond book’s slight short bias seems appropriate as investors push out rate cut forecasts, but Thayer’s investments here have enough length to participate in a rally, while also maintaining variety in issuer type, domicile, and the fixed rate/floating rate mix.
We do expect the year to become more complicated as we approach the U.S. election and continue to contend with ongoing military conflicts. Here again, diversification is key, along with a reminder to remain disciplined and to keep the long-term objective in the forefront of one’s thinking.
We hope you enjoy the Spring. And as always, we value and appreciate your continuing confidence in us.
Sincerely,
David Beckwith
Chief Investment Officer
Thayer Partners, LLC
Thayer Partners LLC is a registered investment advisor. Information in this message is for the intended recipient[s] only. Please visit our website www.thayerpartnersllc.com for important disclosures.
First Quarter 2024 Investment Commentary
Executive Summary:
1. What Happened in 2024’s First Quarter?
With healthy economic conditions persisting, and recession worries pushed farther out on the horizon, stocks carried their late 2023 strength through 2024’s first quarter, leading to their best start since 2019. This benefited Thayer client portfolios, which began the year fully weighted to equities.
The S&P 500 rose 10.4%, while the globally inclusive ACWI gained 8.2%. The NASDAQ was up 9.1%, participating well while not dominating as had been the case in 2023. Equities showed more breadth as perceptions about the economic landscape improved, the latter accruing to the benefit of our position in small/mid capitalization stocks (up 9.9%). The Thayer equity mix also was helped by a slight bias toward U.S. exposure while also equal-weighting Japan, which surged 20.6%, helped by strength in the technology sector. Meanwhile, the equity mix was slightly hindered by its dividend-paying stocks, whose gains were more in the 7% neighborhood.
The resilient economy created headwinds for bond markets. Rates had dropped, and prices risen, over the last ten weeks of 2023 on benign inflation readings and expected economic deceleration, with Federal Reserve chair Jerome Powell more overtly indicating a pivot to rate cuts in 2024. However, pivot hopes ran into stickier (3%+) CPI inflation reports for January and February. This pushed out hopes for a first rate cut off the current 5.25-5.50% level from the March or May Fed meetings to the summer editions or beyond. The AGG bond index thus shed 0.7%, with longer maturities falling a bit more and shorter a bit less. The Thayer bond mix held up relatively well as it remained shorter than the benchmark, notwithstanding a modest lengthening trade three months ago.
2. Did the Federal Reserve Jump the Gun in its Pivot Messaging?
The Fed and investment community alike are grappling with where inflation is headed, along with perceived trends in consumer spirits and behavior. Price stability is half of the bank’s dual mandate, with full employment being the other. (Most of the other main central banks in the world are by charter concerned only with the first.) Normally, rate cuts would be perceived as necessary with benign inflation as well as significant erosion in employment. The first isn’t quite true and the second definitely is not: unemployment remains near 50-year lows at just under 4%. Workers also have enjoyed solid (4%+) wage gains; these could well prove to be the stickiest inflation component, and they are a key input in corporate costs, which get passed along in higher prices.
The Fed has the luxury of an economic environment that doesn’t seem to need any course correction, and this has fortified the “no hurry” message which Powell and other FOMC members have put forward more recently. And another significant variable will loom ever larger as we enter the year’s second half: the November election. The Fed is definitionally independent and apolitical, but any cut or cuts within a few months of the election (meaning the late July and late September meetings, with November’s just after the vote) could be questioned as being politically expedient for the incumbent president. On this landscape, investor emotions could follow a path that is indeed more spirited than usual.
3. Is Artificial intelligence Due for a Reality Check?
Stocks and investor optimism continue to be supported by the Artificial Intelligence theme, and AI chipmaker Nvidea has been a bellwether and Fab 7 leader in early 2024 just as it was in 2023 (surging 82.5% in the first quarter on top of 2023’s 239.0% gain). But there has been some reality checking in at least its early stages. Societal and worker viability concerns already have been worked through. Most agree that any losses of jobs where AI can more efficiently replace a function would be more than offset by promising new job frontiers along with enhanced productivity. More recently, however, we’re seeing a greater recognition of another key issue: energy usage and related environmental impact.
As we attempt to shift from gas-powered cars to EVs, tap AI in the interest of efficiency and innovation, and create new currencies like bitcoin, there are big shifts in how we utilize resources. All three are adding measurably to demands on our electricity grid, and trends are sharply upward. AI alone requires massive amounts of computer generating power, stressing fossil fuel as well as water resources. Data centers today account for 4% of U.S. electricity consumption, and this number is expected to move up to 6% in only two years, with demand continuing to increase by 13-15% annually up to and likely beyond 2030 (sources: The Wall Street Journal, McKinsey Group, investment writer John Mauldin). Clearly, as a society and an energy economy, we will have big decisions to make.
4. How is the Upcoming Election Shaping the Policy Outlook?
Moving into the summer conventions, policy and platform gaming will have a greater impact on investor consciousness, including, along with immigration and social issues, some key economic ones as well. Our fiscal approach, for one, has been for a couple of years upstaged by the monetary side of the policy mix, with all eyes on the Fed. But in a higher rate environment, bringing far higher debt service costs, government spending and borrowing represent a greater issue, and potential burden.
To this end, Biden unveiled a fiscal 2025 budget of $7.3 trillion, above President Trump’s COVID-driven $6.8 trillion, and a far cry from the days late in the Obama administration when $4 trillion was first breached. This sticker shock will be joined in the campaign discourse by whether to extend the 2017 Trump tax cuts next year. The Congressional Budget Office has tallied that the ten-year cost of an extension would be $3.5 trillion, as against today’s running national debt total of $34.6 trillion. But even if Biden wins, unwinding the cuts might be difficult in the new Congress.
Another area is tariff policy, now at a time when the Chinese export economy seems to be newly ascendant and price-competitive, no better symbolized than by EVs priced at around $13,000. Trump has vowed to thwart any sale of these cars in the U.S., threatening tariffs on the order of 100%, and is indicating steep new tariffs more broadly. However, today’s inflation sensitivity compared to Trump’s first term might make a new protectionist program politically challenging. Biden kept Trump’s earlier round of tariffs essentially in place, but now may want to put forward inflation relief, possibly paired with tariff relief, as campaign promises.
5. Are There any Changes in Thayer Portfolio Positioning?
Entering the second quarter, we are holding portfolio holdings in place. Client accounts are well diversified, participating broadly in the markets while carrying some defense through that diversification. While U.S. stocks arguably are fully valued, non-U.S. exposure is significantly cheaper. If not today, at some imminent point it might make sense to upweight emerging markets, which carry steep discounts and may benefit from a China-led resurgence. Meanwhile, the bond book’s slight short bias seems appropriate as investors push out rate cut forecasts, but Thayer’s investments here have enough length to participate in a rally, while also maintaining variety in issuer type, domicile, and the fixed rate/floating rate mix.
We do expect the year to become more complicated as we approach the U.S. election and continue to contend with ongoing military conflicts. Here again, diversification is key, along with a reminder to remain disciplined and to keep the long-term objective in the forefront of one’s thinking.
We hope you enjoy the Spring. And as always, we value and appreciate your continuing confidence in us.
Sincerely,
David Beckwith
Chief Investment Officer
Thayer Partners, LLC
Thayer Partners LLC is a registered investment advisor. Information in this message is for the intended recipient[s] only. Please visit our website www.thayerpartnersllc.com for important disclosures.