Strubel Investment Management letter to investors for the first quarter ended March 31, 2024.
Dear Investors,
Before we get into the economic and market news for this month, I have a personal note. I will be on vacation starting Friday, June 7 and returning back in the office Monday, June 24. I will be reachable by cell phone for any clients with an urgent need.
The economic news continues to be much the same as we’ve seen all year, with the only major topic being the future of inflation and interest rates. Since the Fed stopped raising rates back in July 2023 (and even before then) the market has continually gotten the scope and pace of Federal Reserve interest rate policy wrong. The market predicted interest rates would start falling at the end of 2023 and the beginning of 2024. Then at the beginning of 2024, the prediction for rate cuts moved out to March. Then forecasts moved from March out to June.
While inflation is dropping, it’s coming down far more slowly than the market (and the Fed) thought it would. Inflation (measured by the Federal Reserve’s preferred statistic PCE) has fallen from a high of 7.1% to 2.7%.
As you can see in the graph, however, the rate of decline has leveled off over the past few months. Now, the June cut predication has become only a 50% chance of a cut in September and a 67% chance in November.
I think the reasons for this are two-fold, and I’ve mentioned them in previous newsletters. First, the Federal deficit has not returned to pre-COVID levels.
Prior to COVID, the deficit was around ~4% of GDP. Now, it’s around 6% and is projected to grow, not shrink. While a small or moderate-size Federal deficit is normal (it’s essentially needed to satisfy the private sector’s savings rate), a deficit that is too large, especially when we are nearing full employment with a strong labor market, can add inflationary pressure to the economy. In this case, the deficit is not large enough to cause major disruptive problems; but it is large enough to keep inflation from falling quickly. It may even keep inflation at about 2-3% of the market, rather than returning to the 2009 to 2019 era of sub 2% inflation.
The other, second, reason inflation may stay higher is that while we are all used to inflation of around 2%, which is what’ve we experienced the decade prior to COVID, when we zoom out and look at a larger timeline, inflation has historical averaged over 3%. There is no natural phenomena or economic law that says inflation must always return to 2%. If the economy is growing, the labor market is strong, and the deficit is still high, then it’s possible we may see inflation level off in the 2-3% range, instead of below 2%.
There is a very real chance we won’t see any interest rate cuts this year. Or, we may see just one this year. For the real economy it doesn’t make a big difference if the Fed cuts in June, in November, or in 2025, except for a few interest-rate-sensitive sectors. For investors, the continuing uncertainty around the timing of interest rates means the best thing to do is continuing what we’ve been doing for client portfolios: sticking mostly to short-term bonds.
In summary, the news is for this month is basically the same as the previous months.
Disclaimer
Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.
The performance data presented prior to 2011:
- Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
- Performance is calculated using a holding period return formula.
- Reflect the deduction of a management fee of 1% of assets per year.
- Reflect the reinvestment of capital gains and dividends.
Performance data presented for 2011 and after:
- Represents the performance of the model portfolio that client accounts are linked too.
- Reflect the deduction of management fees of 1% of assets per year.
- Reflect the reinvestment of capital gains and dividends.
The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.
The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.
