The stock market has had a strong start to the year, with the S&P 500 rising over 10 percent in the first three months of 2024. There have been 22 record highs during this period, and roughly 40 percent of the stocks in the index are trading higher than they were a year ago. Even on days when the index has fallen, the losses have been minimal, with only three instances of a drop of more than 1 percent by the closing bell. This surge has been driven by renewed investor appetite for stocks, with around $50 billion poured into US stock funds in March.
Investors initially rallied on the expectation that the Federal Reserve would cut interest rates in 2024, but this optimism has now evolved into a broader belief that the central bank can successfully bring inflation down to 2 percent without harming the economy, a long-awaited “soft landing.” This positive sentiment has spread beyond stocks to riskier areas of financial markets, such as bitcoin, which reached over $70,000 following regulatory changes that made it easier for ordinary investors to buy funds tracking the cryptocurrency. Mergers and takeovers have been on the rise, and demand in credit markets has increased, indicating optimism about the outlook for corporate America.
Despite the Fed considering multiple interest rate cuts throughout the year, the returns available to investors in the US remain more attractive compared to other global markets. This has resulted in continued inflows of money into the country from around the world. However, some caution is warranted, as cracks are beginning to appear in the economy. Consumer finances are showing signs of strain, with rising credit card debt and a surge in delinquencies on car loans. Additionally, the number of companies defaulting on their debts has more than doubled from the previous year.
While the Russell 2000 index of smaller companies also saw gains in the first quarter, it lagged behind the larger firms that are currently driving the market higher. The dominance of big companies in the stock market has continued, with a small group of companies accounting for a significant portion of the S&P 500’s rise. The so-called Magnificent Seven from last year, including Nvidia, Meta, Amazon, and Microsoft, have had a substantial impact on the market’s performance. Despite steep drops for companies like Apple and Tesla, the overall market continues to rise due to good earnings, lower interest rates, and strong consumer spending.
The market’s performance in the face of economic challenges and uncertainties has raised concerns among some analysts, including Andrew Brenner, who warns of potential trouble ahead. Issues such as rising consumer debt and increasing company defaults suggest that the current upward trend may not be sustainable in the long term. It remains to be seen how long the current positive momentum in the stock market can continue amid ongoing economic and financial challenges. For now, investors are enjoying the gains in stocks, but a cautious approach may be necessary given the underlying vulnerabilities in the economy.
