First Quarter Insights: Looking Back, Looking Forward
The first quarter of 2024 came and went with few surprises for investors. Volatility remains well below historical averages, and several global equity markets continued to reach new all-time highs throughout March. Stalling inflation in recent months fueled concerns the Fed may be forced to keep interest rates higher for longer, but markets so far have taken higher rates in stride, focusing on strong earnings and economic growth. Today, all measures of inflation are substantially lower than they were a year ago, and central banks around the world are expected to begin easing monetary policy in the second half of this year. All told, a globally diversified 60% equity (MSCI ACWI Index) / 40% bond (Bloomberg Global Aggregate) portfolio has returned nearly 5% for investors so far this year.
Stocks – New All-Time Highs
It was another rewarding quarter for equity investors who experienced a continuation of many of the same trends from 2023. The S&P 500 posted a total return of 10.56%, marking the best start to the year since 2019. Small cap stocks had a strong start to the year as well, as the Russell 2000 managed to rally more than 5%. Stocks in the energy, communications, financials, and industrial sectors were amongst the top performers, while real estate, consumer discretionary and utilities stocks rounded out the bottom. International developed stocks were firmly in positive territory as well, with the MSCI EAFE index higher by nearly 6% in total return. Emerging market stocks struggled to keep pace with their developed market counterparts, adding about 2.5% in total return for the quarter.
Market Breadth Expanding
Looking back on the past quarter, we found it encouraging to see market breadth expanding as markets moved higher beyond the Magnificent 7 stocks. While the largest contributors to first-quarter returns in the S&P 500 were NVIDIA, Microsoft, and Meta, the largest detractors were Apple, Tesla, and Adobe. Outside of the real estate sector, which is lower by about 0.65% on the year, all other sectors of the U.S. market are firmly higher year-to-date. In addition, small cap stocks have been off to a strong start as well, along with several international markets such as Europe (STOXX 600 index) and Japan (Nikkei 225 index), which both reached new all-time highs in March.
Bonds – Higher Rates Pressuring Prices
Interest rates grinded higher over the first quarter of 2024, translating into modestly negative total returns for bond investors. After starting the year at 3.86%, the yield on the 10-year Treasury note finished the quarter trading around 4.21%. As a result, the Bloomberg taxable bond index finished the quarter about 0.80% lower in total return, while the Bloomberg municipal bond index was lower by about 0.40%. In general, we continue to view most areas of fixed income as relatively attractive for investors looking to their portfolio for stable cash flow and diversification to equities.
Federal Reserve – Standing Strong
The most recent FOMC's policy-setting meeting in March marked the fifth consecutive meeting at which the Fed opted to hold interest rates steady at the current target range of 5.25%-5.50%. Notably, the Fed reaffirmed its expectations for three rate cuts by year-end, but stressed the need for further evidence that inflation is on its way to 2%. With just six policy-setting meetings remaining this year, the markets currently are expecting the Fed to begin cutting rates at the June meeting, followed by additional cuts in September and December. This would bring the federal funds target range from its current target of 5.25%-5.50% to 4.50%-4.75% by year-end
Economy – Growing, but Slowing
Economic indicators in the first quarter continued to point toward a growing but slowing economy. The final estimate of fourth-quarter GDP showed the U.S. economy expanded at an impressive 3.4% annualized rate. Consumption remains the primary driver behind the numbers, reflecting a strong U.S. consumer. This shouldn’t be surprising, given the fact the labor market remains exceptionally strong. Growth in the supply of labor, driven by increased labor force participation and immigration, continues to support job gains. In the Fed’s most recent summary of economic projections, the central bank upgraded their growth forecasts for 2024 from 1.4% to 2.1%. Separately, the Atlanta Fed’s GDPNow model currently expects first-quarter GDP growth for 2024 to come in around 2.8% on an annualized basis. All this to say, the economy continues to remain surprisingly resilient despite higher interest rates, tighter credit conditions and dwindling excess savings. Meanwhile, inflation continues to show progress, albeit slowly. Over the remainder of the year, we expect inflation to continue its slow descent back toward 2%.
Outlook: Where do we go from here?
Looking forward, we continue to remain optimistic on the long-term outlook for both stocks and bonds. Following more than a decade of exceptionally strong performance in the U.S. market, equity valuations sit near the higher end of their range and as expected, nothing appears exceptionally cheap right now. Nearly all areas of the U.S. stock market currently are on the higher end of their long-term averages from a price/earnings or P/E multiple standpoints. Still, we think there's good reason stocks can continue to move higher. There is no reason to expect that elevated valuations will lead to negative performance in stocks, but evidence suggests we could expect forward returns to be lower than average. With that said, corporate profits remain strong, and over the next 12 months, S&P 500 companies are expected to grow earnings by nearly 10%. As a portfolio management team, we continue to stress the importance of diversification in our client portfolios.
Alex Mayrand, CFP®
Partner, Chief Investment and Information Officer, Senior Financial Advisor