Market Review Q124

The first quarter was another banner one for stocks with total returns for the S&P 500 up over 10%. Artificial intelligence was the dominant theme and the Magnificent Seven stocks led the way. The prospect of rate cuts by the Fed provided an additional tailwind.

This rebound has been a welcome development for investors in light of a scary selloff that began last summer and persisted into the fall. Can recent momentum be maintained or is the rally likely to be derailed? What should investors be on the lookout for?

The only game in town

A good starting point for analyzing the investment landscape is to recognize the prevailing market narrative continues to be that monetary authorities are running the show. This is understandable since central bankers have basically commandeered markets with extraordinary monetary policy ever since the GFC.

As such, there has been a logic to vigilantly following central bank communications; that's how you stay attuned to the primary force driving markets. The focus on monetary policy had the advantages of being simple to understand, easy to implement ... and mostly right.

Ever since Covid, however, the paradigm of central bankers driving markets has been less consistently effective in guiding investors. While massive liquidity infusions during the pandemic fueled a huge rally in stocks, the magnitude and duration of rate hikes by the Fed fooled a lot of investors. While a dovish pivot by the Fed late last year reversed an ugly market slide, it is looking increasingly misguided today.