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Client Letter – April 2024

Q1-2024 Market Results

The recovery continues. The first quarter of 2024 was strong, especially as it relates to stock investments. For the quarter, the S&P 500 was up +11.17%, an impressive run after last quarter’s strong return. International markets were also up at +5.06% for the quarter. Emerging markets were up but less strong at +1.90% for the quarter. Bonds continued their disappointing run, with Intermediate bonds down at -0.78% for the quarter. Short treasuries were up slightly at +0.26% for the quarter.

Taking a closer look at the markets, we see the S&P 500 had a small dip at the very beginning of the quarter but then experienced a consistent upward move through the remaining quarter. U.S. Technology, a new asset class we are following, also had a strong run in the quarter with a very slight dip at the very end. Bonds are the disappointing area where our expectations have not come true. We felt that the idea of interest rate reductions, which appear to be coming soon, should be enough for bonds to rally from their dismal performance in 2022 and 2023. Although we have seen a small rally in bonds, it has not been what we expected. We aren’t alone in our thinking, as most analysts we read have also thought bonds would start to rally with expected interest rate reductions.

Portfolio Thoughts

Portfolios were up nicely in the first quarter, mainly helped by equities. Tactical portfolios were up, but Strategic portfolios outperformed Tactical. It appears this was due to U.S. large cap stocks that did not perform as well in the Tactical portfolio as the Strategic. Our Momentum portfolio (AAA) did better than Strategic due to its momentum focus on U.S. stocks. Capital Preservation was positive but not as strong as we would have hoped due to the lack of bond recovery.

Q1-2024 Notes

We believe the strong first quarter results are because the U.S. economy has shown tremendous resilience since the market drop in 2022. Hiring remains strong and the unemployment rate remains near historic lows. Gross Domestic Product (GDP) has surprised to the upside and housing remains strong at least in part because personal wealth is near historic highs. 

Most analysts expected a recession to hit in 2023 that never occurred. Although we saw the chance of recession in 2023, we were not convinced it would happen. We still feel a recession in 2024 is not likely, though late 2024 and getting into 2025 our recession concerns are higher. Interest rates are high on the economic discussion list today and we can see why. The Federal Funds interest rate is currently high at +5.25% to +5.50% and has been held there for about eight months. But inflation has remained stickier than desired, so the idea of reducing interest rates has been tabled hoping inflation would move closer to its +2.00% target. January 2024 inflation was +3.1%, then February came in at +3.2%. While the two numbers are very close, the fact that February did not go down was disappointing. 

At the beginning of the year many analysts thought we would see our first interest rate reduction at the March Federal Reserve (Fed) meeting. Then after the January inflation reading came out many analysts shifted to the first rate cut at the May Fed meeting. Now, after the February inflation reading the bulk of the discussion has shifted again to the first rate cut at the June Fed meeting. We agree with this and feel a June rate cut makes sense.

Globally

On a global topic we would like to bring up a shift we are seeing in Europe. In March 2024 French President Emanuel Macron suggested that France could send French troops into non-combat operations in Ukraine. And he has been courting opinion in Finland as well as the Baltic state of Lithuania to improve his position. This is a very large shift in European war thinking. No European country has even considered getting directly involved in the Ukraine war, but that may be starting to change. And with good reason. 

As the U.S. support for Ukraine has flustered in the U.S. Congress and Russia has made small territorial gains against Ukrainian forces, it may very well be time for Europe to consider what would happen if Russia won in Ukraine. Russia has a deep desire to expand its buffer zones that would slow an impending invasion of Russia and there is no buffer zone more susceptible than Ukraine. Thus, the reason for their February 2022 invasion. But many experts worry what Russia might do next if they succeed in overtaking Ukraine. 

Taking Ukraine would put Russian forces at the border of Poland, Romania, Hungary, Moldova, and Slovakia. All but Moldova are North American Treaty Organization (NATO) members. Would Russia try to invade one of those countries to push their buffer zones further? Or to shift that country’s influence toward Russia? France is far away from the activities in Ukraine, and not in immediate danger, but France (and other countries) should worry about what could come next. Emmanuel Macron knows that no country will support sending troops to Ukraine for direct combat with Russia. Europe, and NATO very much want to avoid direct confrontation with Russia, because Russia is a global nuclear power, and the risk of escalation is too high. Russia is also cautious of a direct conflict with NATO, not only because of escalation risk, but also because Russia knows it can’t stand up to the military might of the combined NATO forces. However, knowing that NATO is hesitant to get involved directly, could lead Russia (i.e. Vladimir Putin) to push the limits. 

If European troops were sent to Ukraine, they could play non-combat roles such as guarding the border with Belarus or de-mining operations or even technical work on the power systems that Russia has bombarded. This would allow Ukrainian forces to concentrate more on their front-line combat needs. Germany has been vocal in its lack of support for sending troops to Ukraine. And they may be right that Ukraine can hold-off Russia, but without more U.S. support that could erode quickly. Ukraine doesn’t have the capacity to fight this war without outside help. Europe is stepping up more support now than in the beginning, but U.S. support is considered critical. 

All of this is unfolding as Europe has recently outlined its “Defense Industrial Strategy” designed to improve collaboration in Europe’s defense. This new initiative is in no small way being driven by Russia’s invasion of Ukraine and the clear defense weaknesses it has highlighted. Former President Donald Trump was vocal about Europe’s weaknesses and poor record of NATO funding. Those comments were frowned on at the time, but now the fear of Europe without security support from the U.S. is more real and frightening. 

From our view, we believe Europe is shifting to wanting to create and support their own security and protecting Ukraine is becoming part of that conversation. From our view, we believe Emmanuel Macron’s idea could become real. European troops in non-combat roles in Ukraine could be in the future.

As always, we will watch and research the global economy and make investment choices to the best of our ability for every client portfolio. If you have questions about your portfolio, our views expressed in this letter, or anything else financial, please do not hesitate to call.

Best Regards,

James Thibault
Managing Partner

Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Securities and Exchange Commission.

This newsletter is for general information only and should not be considered investment advice.  Investors should consult with a trained investment professional to discuss their particular situation.

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