February 1, 2024
Equity markets were mixed in January, as the S&P 500 was up +1.68%, US small caps -3.95%, US mid-caps -1.71%, international developed +0.27%, and emerging markets -4.23%1. The US Aggregate Bond Index declined -0.27% in January1.
On 1/5/24, after a large rise in equity markets in December 2023, we trimmed equity exposures for most client portfolios back down to target equity allocations. Valuations had become less compelling and sentiment among many investors had become more optimistic, which we thought could increase the risk of a short-term decline in equity markets if an unfavorable news item were to emerge.
Later in mid-January, data was released indicating that inflation, as measured by the Consumer Price Index (CPI), rose +3.4% year-over-year (YoY) in December 2023, a modest acceleration from the +3.1% YoY inflation reading for November 20232. Overall, we continue to believe that inflation will continue its general downward trend towards the US Federal Reserve’s 2% inflation target over time, driven primarily by a moderation in residential rent inflation and secondarily by a potential relative stabilization in oil prices. While unfortunately we don’t anticipate prices to broadly come down in the economy, we do expect that a moderation in the rate of inflation (prices rising at a slower rate) will continue to be supportive of equity markets and result in positive equity returns for 2024.
The 10-year Treasury yield (10yrTy) rose in January from 3.88% to 3.99%, causing Treasury bond prices to decline1. Also on 1/5/24, after the 10yrTy had come down from 4.98% and Treasury bond prices had risen, we reduced our exposure to Treasury bonds with a 7-10 year maturity in favor of more exposure to Treasury bonds with a 1-3 year maturity1. This should help to reduce short-term volatility, or price fluctuations, on the fixed income side of client portfolios. If the 10yrTy were to rise significantly above 4.18% (our 2024 year-end forecast), we would likely increase the average bond maturity for most clients.
External sources: Refinitiv data1, US Bureau of Labor Statistics2
For more information about our investment philosophy, see MTC Wealth Management.
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