CIO Quarterly Update – Q2 2024 Stop Waiting for a Goldilocks Moment

April 16, 2024
We are a little over a year out from the collapse of Silicon Valley Bank, and it is interesting to reflect on how markets have fared since that time. The US equity market is up over 26%1 over the last year and has soared to reach new all-time market highs in 2024. The market malaise of 2022 and fears of an imminent recession feel well behind us. I am reminded of the quote:
“Pessimists sound smart. Optimists make money”
There were many reasons to be pessimistic in the aftermath of the regional banking collapse last year. The yield curve was inverted, with short-term borrowing rates higher than long-term borrowing rates, generally a sign that investors are pessimistic about the economy’s prospects. Short-term borrowing rates were the highest they had been in a decade, and inflation was also stubbornly high at close to 5%2 . There were many plausible “smart” reasons to believe the economic sky was falling. A few of the most compelling ones are noted below:
  • Consumers had run out of pandemic savings and would tighten their belts in the face of rising grocery and household bills.
  • Businesses were holding back on major investments and waiting to see what happened before they invested.
  • Private market deal making would dry up, and companies that had borrowed at variable rates and needed to refinance wouldn’t make it.
  • The EU ban on Russian oil products like diesel and fuel oil could cause an oil supply shock and exacerbate already high inflation.
Some of these fears were well-founded – they usually are – but the people who lose out are the ones who sit on the sidelines waiting for a better time to invest. Waiting for that “Goldilocks moment” when the market is underpriced, and the future looks rosy. They are probably still waiting, and the market is 26% higher than it was a year ago.

Looking ahead

By that same token, the stock market looks frothy to some investors today. The S&P 500 Index just posted two consecutive quarters of +10% returns for only the ninth time since 19403. Can we reasonably expect this market rally to continue?

Although a market correction or pullback can never be ruled out, given the nature of markets and investing, there are always unforeseen events (e.g., geopolitical risks or other crises) that can crop up and derail the current trajectory. When looking at the long-term, I would argue this is one of the healthiest investing environments we have seen in a while.

Reasons for optimism

One of the key drivers of the market rally over the past year has been optimism around the potential for Artificial Intelligence (“AI”) to propel the next phase of economic prosperity. The key beneficiaries of this optimism have been some of the largest technology stocks. As an example, Nvidia stock advanced 82% in the first quarter of 2024, and the firm contributed 21% of the market’s gain alone4. Other large contributors were Microsoft, Meta, and Amazon. Concentration of stock market gains in some of the largest stocks was a big theme in 2023. Over the long-term, the productivity benefits of AI are likely to be reaped by a much broader swath of companies and sectors across the economy – what we have seen so far is likely just the tip of the iceberg relative to the long-term opportunity.

A return to normalcy with a “healthy” cost of borrowing.

Although the yield curve remains inverted today and many expect that rates will be higher for longer, I welcome these higher rates. One of the consequences of zero-interest-rate policy for so many years was that “free” money distorted capital allocation and allowed unviable businesses to stay afloat. With a higher rate environment, we can expect businesses to be more discerning about the investments they make and the risks that are taken.

Over time we may see zombie companies fail and business models that relied on cheap financing unable to stay afloat, but this is a natural and healthy cycle for the market to continue to evolve. The companies that were the winners and at the vanguard of innovation fifty years ago are not the same companies that are winning today. An investor who is appropriately diversified and prudently invested will be able to withstand and ultimately benefit from these cycles and this natural regeneration of the economy.

Another benefit of a higher level of real interest rates is that it offers opportunities for investors in fixed income who are in retirement and want a more conservative level of risk in their portfolios.

A final thought

As we continue to navigate the ever-changing landscape of the financial markets, it’s essential to recognize that sitting on the sidelines and waiting for a “Goldilocks moment” carries a steep opportunity cost. By embracing the opportunities presented by the evolving market dynamics, we can position ourselves to capitalize on long-term growth prospects while weathering the inevitable fluctuations along the way.

1 Source: Morningstar
2 Source: Bureau of Labor Statistics
3 Source:
4 Source: Morningstar

Written by Rafia Hasan

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