This year has gotten off to a rocky start for the stock market.
The S&P 500, one of the world's most widely followed stock indexes, rose more than 10% in the first three months of 2024, buoyed by 22 new record highs.
About 40% of index constituents are trading above their 12-month-old level. And even when the index has fallen, it hasn't fallen all that much: Since the start of 2024, the S&P 500 index has fallen by more than 1% on just three days.
The move is being driven by renewed appetite for stocks. Investors poured about $50 billion into funds buying U.S. stocks in March, according to data from EPFR Global.
A modest increase in January on expectations that the Federal Reserve will start cutting interest rates before the end of the year gives the central bank the ability to bring inflation down to its 2% target without significantly damaging the economy. There was widespread optimism that it could be done. “Soft landing” has been long awaited.
New inflation and spending data released Friday were in line with economists' expectations and confirmed the general expectation of the Fed's interest rate moves. “There's no rush to cut rates,” Federal Reserve Chairman Jerome H. Powell said at an event Friday.
In markets, the boom has spread to riskier parts of the financial system. Bitcoin continues to trade above $70,000, reaching that threshold for the first time this month after regulators made it easier for retail investors to buy funds that track the price of cryptocurrencies. At the same time, mergers and acquisitions have proliferated, and the public debuts of Reddit and Trump Media were greeted with huge jumps in stock prices on the first day of trading. And in the credit markets, where investors finance companies through bonds and loans, demand for borrowing and willingness to lend has swelled, a sign of optimism about the outlook for American businesses.
Even though the Fed is considering up to three rate cuts this year, totaling three-quarters of a percentage point, the returns provided to investors will still far exceed those seen in other parts of the world. to the United States, helping to keep funds flowing.
“We're seeing that all over the world,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
But Brenner also sees reason for caution. Cracks are appearing in the economy and consumer finance is beginning to decline. Credit card debt is rising, and the number of people who are delinquent on their car loans is surging at the fastest pace in more than a decade. Some companies are also starting to suffer, with the number of debt defaults more than doubling last year, according to S&P Global.
The Russell 2000 index of small companies, a measure of companies susceptible to the rise and fall of the nation's economy, also rose in the first three months of the year, but only by 4.3%. This is a reminder that the biggest companies, especially those riding the wave of optimism about artificial intelligence, are driving the stock market rally.
“Right now, stocks are working for people,” Brenner said. “I wonder how long it will be before there's a problem.”
The so-called “Magnificent Seven” group of stocks that boosted the market last year continues to have an outsized influence, accounting for nearly 40% of the S&P 500's gain in the first three months, according to data from S&P's Howard Silverblatt. Occupied.
But Apple and Tesla's plunge meant that an even smaller group of companies (Nvidia, Meta, Amazon, Microsoft) pushed the market to new heights. They were solely responsible for half of the index's rise.
“Earnings are good, interest rates are off their peak, consumers are happy to spend their paychecks, and employment remains high,” Silverblatt said. “So the market continues to rise.”
