Quarterly Commentary: First Quarter 2024

The markets entered 2024 with strong momentum on the heels of a 4th quarter rally in global stock and bond markets. This rally was spurred by solid earnings and the supposition the Fed had orchestrated a soft landing, thus giving them the green light to contemplate lowering rates. Yet, as the quarter unfolded, some hot inflation readings showed signs it may remain sticky, with the “last mile” to the Fed’s 2% target perhaps more elusive than many anticipated. Markets mostly shrugged off this inflation data, focusing more on corporate earnings, as well as healthy employment and wage growth. 

Within the U.S. market, the Magnificent Seven stocks continued to make headlines, but the story has shifted from dominance to divergence with Tesla and Apple down double digits while Nvidia remained on a tear. We also witnessed a broadening of participation in U.S. stocks to areas outside of tech. Small-cap stocks (Russell 2000 Index) had a solid quarter but remain below their peak from 2021.

Developed international equities (MSCI EAFE Index) advanced on improving economic conditions but were tempered by the European Central Bank’s uncertainty about the direction of their interest rates. China continues to be a drag on the emerging markets (MSCI Emerging Markets Index), as investors wait to see how the Chinese government responds to its slower growth and real estate challenges. 

Fixed income (Bloomberg US Aggregate Bond Index) had a tepid quarter due to continued economic strength and the recent trend of hotter inflation measures, which pushed the 10-year Treasury yield back above 4%.

Index1Q24 (01/01/24-03/31/24)1 Year (04/01/23-03/31/24)
S&P 500 Index10.6%29.9%
Russell 2000 Index5.2%19.7%
MSCI EAFE Index5.8%15.3%
MSCI Emerging Markets Index2.4%8.2%
Bloomberg US Aggregate Bond Index-0.8%1.7%


In the second quarter, while we are cautiously optimistic, we expect more market volatility, as evidenced by this past week’s declines, spurred by weak guidance from the banking industry. Geopolitical events are also weighing on current market sentiment, with the Ukraine/Russia conflict showing no signs of resolution, and tensions in the Middle East escalating. Ramifications of Sunday’s retaliation from Iran against Israel are yet to be seen, as the world hopes cooler heads will prevail in this recent turn of events. 

Markets remain positive about the Fed’s ultimate path toward lower rates considering the tangible evidence of disinflation from recent highs. However, there is a chorus of grumblings about the state of our burgeoning debt and deficit spending that has experts and investors wondering how this will affect the Fed’s ability to get and keep rates low in the face of this seemingly endless escalation. We have broached the subject of our debt and deficits in the past but thought it timely to revisit this issue again. 

The Unsustainable U.S. Debt Model

In a perfect world, governments have small budget surpluses, have no debt, and accumulate positive reserves. Yet, the reality is that most governments are forced to periodically run budget deficits as a response to recessions or unforeseen events like the recent pandemic, which occur in normal economic cycles.  Philosophically, there is no reason to accumulate permanent debt.  Yet, through poor leadership and decision-making, the U.S. finds itself with a growing debt balance as a percentage of Gross Domestic Product (GDP) approaching historical levels. Meanwhile, we continue to run budget deficits even though we are not in recession. 

U.S. Debt Set to Climb Further 

Each year, the Congressional Budget Office (CBO) publishes a report presenting its 30-year projections of what the federal budget and the economy will look like if the current trajectory remains unchanged. The CBO released this report at the end of March 2024, and it shows some staggering forecasts.

According to the CBO, U.S. government debt is set to keep rising, and forecasts our debt level to reach 166% of GDP by the end of 2054! They comment that “such large and growing debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices.” The following graph demonstrates the path of our debt:

Source: CBO

U.S. government debt has soared under both Republicans and Democrats in recent years, swelled by former President Donald Trump’s tax cuts in 2017 and pandemic stimulus under President Joe Biden.  Deficit spending, where our outlays are greater than revenues, and net interest costs are key culprits in driving the increase in debt level. The chart below shows the significance of these costs: Source: CBO

Source: CBO

Interest costs rose to $659 billion in fiscal year 2023, which ended on September 30, according to the Treasury Department. These costs are up 39% from the previous year and almost double what they were in fiscal year 2020, spurred by rising interest rates and increasing debt.

Our chronic deficit spending has resulted in a structural debt problem to which there is no painless solution.  For example, in fiscal year 2023, the government spent more to service its debt than it did on each area of housing, transport, and higher education according to the Committee for a Responsible Federal Budget, a non-profit. 

A Trillion Here, A Trillion There

The sheer size of the numbers relating to our deficit spending and our national debt is mind boggling.  We constantly see numbers bandied about in the media when referring to these issues, like the recently published federal debt number of $35 trillion (March 2024). When we refer to trillions of dollars, most people have no practical reference point as to the magnitude of these numbers. To help put this in perspective, let’s look at a trillion in terms of time. One million seconds is just over 11.5 days, one billion seconds is approximately 31.5 years, and one trillion seconds is 31,500 years! Put another way, if you had started spending $1 million dollars a day on January 1, 000 A.D., it would still take you another 700 years from today to spend $1 trillion dollars!

The cyclical issues in our economy, while important, simply pale in comparison to the structural monster we have created.  Despite this fact, our legislators seem unwilling to tackle these issues in a meaningful way.  As the baby boomers continue to reach retirement age, the hole we are digging will grow deeper and deeper if it is not addressed.  Everyone acknowledges the need for change, but very few are willing to accept any personal sacrifice to make it happen.  One thing is certain; if we stay on this path, most of us will not be able to count on the benefits that have been promised.  

How is Wealth Dimensions Addressing this Issue?

The rising U.S. debt level presents potential challenges for investors, as markets adjust to evolving economic conditions and policy directions around this growing liability. In one scenario, we could experience higher interest rates for longer even if the Fed initiates rate cuts, as investors would demand a higher yield to compel them to buy our government debt. These higher rates, which are already impacting both businesses and consumers with higher borrowing costs, could negatively impact growth.  To mitigate a higher-interest-rate-for-longer-type scenario, we continue to seek to focus on high-quality investments in both equity and fixed income. Our portfolios are tilted toward stocks with strong fundamentals, such as profitability, and shorter-term bonds healthy liquidity and higher yields.

As U.S. citizens, each of us has a duty to be part of the solution by demanding responsible change at the political level and by doing our part to keep this country on a path to prosperity.  On a personal level, we all have the same duty to our families and ourselves to be excellent stewards of our wealth.  At Wealth Dimensions Group, it is our mission to partner with you to make prudent and impactful decisions toward a secure financial future. 

Thank you for your continued confidence in our services.

– The Wealth Dimensions Team

The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. 
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. 
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
Sources include:  The Long-Term Budget Outlook: 2024 to 2054 by Congressional Budget Office on March, 2024

For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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