Q1 2024 Market Snapshot
Highlights of Q1 2024
The first quarter of 2024 reflected a much more evenly distributed rally compared to the fourth quarter of 2023, where tech and tech aligned sectors handily outperformed the rest of the markets. Over the past three months markets saw broad gains distributed more equitably amongst various sectors and industries. From an investment style standpoint, growth once again outperformed value in the first quarter but the margin was much closer than last year, as both investment styles logged strong quarterly returns. Continued heightened AI enthusiasm was the main reason for the modest growth outperformance over the past three months, as large-cap tech stocks again saw strong rallies in Q1.
Internationally, foreign markets posted solid quarterly gains but still underperformed the S&P 500. Looking deeper, foreign developed markets outperformed emerging markets in Q1 thanks to better-than-expected economic data and as expectations rose for early summer rate cuts from the European Central Bank and Bank of England. Meanwhile, Emerging markets, logged only slightly positive returns in Q1 and solidly underperformed the S&P 500 thanks to mixed Chinese economic data and a lack of substantial Chinese economic stimulus early in the quarter.
Through the quarter, the Fed kept interest rates the same and with continued resilient economic data, investors began to price out the number of expected rate cuts in 2024. While the economy largely continues to prosper, unemployment did rise in February to 3.9%, though the economy continues to create jobs at a healthy pace above the pre-pandemic average. The yields on the U.S. 10-year and 2-year notes have also risen since the start of the year, after a steady decline in the second half of 2023. Presidential primaries were held in several states during the quarter. Donald Trump is the presumptive nominee of the Republican Party while his main challenger Nikki Haley dropped out of the race in March.
Data releases generally demonstrated ongoing economic resilience. Annualized GDP growth for Q4 was revised up in the third estimate to 3.4%. Non-farm payrolls were robust although the unemployment rate rose in February. The ISM manufacturing PMI signaled expansion after 16 straight months of contraction, rising to 50.3 in March. Fed chair Jerome Powell said that the central bank will be “careful” about the decision on when to cut rates.
Debriefing Q1 2024
US Equities
On a sector level, as mentioned, gains were broad as 10 of the 11 S&P 500 sectors finished the first quarter with a positive return. Unlike 2023, however, tech and tech-aligned sectors
didn’t substantially outperform.
To that point, the best-performing sectors in the market in the first quarter were communication services, financials, energy and industrials. That sector mix reflected the influences of AI enthusiasm, strong financial stock guidance, solid U.S. economic data and rising optimism towards a rebound in Chinese economic growth. The diversified gains demonstrated that the Q1 rally was driven by a more varied set of influences beyond just AI enthusiasm.
Turning to the laggards, the only S&P 500 sector to log a negative return for the first quarter was the real estate sector, as it continues to be weighed down by concerns about the health of the commercial real estate market. Specifically, terrible quarterly earnings from New York Community Bank reminded investors of the sustained weakness in the commercial real estate market and that weighed on the real estate space. Consumer discretionary also lagged and registered only a slightly positive return as numerous retailers warned about a potential slowing of consumer spending during the first quarter (this is something to monitor as we begin the second quarter).
The Bond Market
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays U.S. Aggregate Bond Index) realized a slightly negative return for the first quarter of 2024.
Disappointing inflation readings were the primary reason for the weakness in bonds as they delayed the expected start of Fed rate cuts from March until June and caused bond investors to consider that rates may be higher than previously expected over the medium and longer term.
Looking deeper into the fixed income markets, longer-duration bonds handily underperformed those with shorter durations. That performance gap was due to the slower than-expected decline in inflation, because while it won’t materially delay the start of Fed rate cuts, it does threaten to keep rates “higher for longer,” which is a bigger negative for longer-dated debt.
Turning to the corporate bond market, higher-yielding but lower-quality “junk” bonds outperformed investment grade debt as looming Fed rate cuts and buoyant inflation, amidst stable economic growth, led bond investors to “reach” for more yield in the riskier parts of the credit spectrum.
Jobs and Consumer Confidence
In the U.S., the unemployment rate hit 3.9% in February, a two-year high. But it came back down to in March to 3.8%. In March, 303,000 jobs were added to the non-farm payroll, the most in ten months, compared to a downwardly revised 270K in February and forecasts of 200K. Employment gains remain elevated by historical standards and continue to surpass the 70K to 100K needed monthly to keep up with the expanding working-age population.
U.S. Consumer Confidence was 104.7 in March, essentially unchanged from a downwardly revised 104.8 in February. Consumers remained concerned with elevated price levels. expectations for the next six months slipped to the lowest level since October 2023. Consumers’ outlook for future business conditions, labor market conditions, and income expectations all deteriorated in March.
The Dollar Index and Commodities
The U.S. Dollar Index (DXY) had a topsy-turvy quarter. The volatility in the currency’s strength helped the earning of many technology companies, but it affected the country’s exports.
Commodities saw strong gains in the first quarter thanks to still-elevated geopolitical tensions, a weaker U.S. dollar and smaller-than-expected declines in inflation. Oil rallied sharply in Q1 thanks to late-quarter optimism for an acceleration in Chinese economic growth, combined with an increase in geopolitical tensions following the continued attacks on commercial ships in the Red Sea, along with an increase in Russian attacks on Ukrainian energy infrastructure. Gold hit a new all-time high in the first quarter, meanwhile, and logged solidly positive returns thanks to the aforementioned buoyant inflation data and a weaker U.S. dollar.
Looking Ahead
The current U.S. outperformance reflects a combination of perseverance, opportunism, and good fortune. The ongoing wave of increased investment has been driven by the impetus given to developing homegrown chip manufacturing abilities and robust business formation. In addition, there was a sharp pickup in labor productivity in recent quarters, boosting potential growth and holding labor costs in check.
The U.S. real GDP should grow 2.5% in 2024 given the current state of the labor market. The economy should transition to slightly below-potential growth and inflation will likely remain above the Fed’s target of 2% through 2024, reflecting persistently higher service price inflation. This could occur even as goods prices ease modestly. Above-target inflation will limit the Fed’s ability to ease rates this year.
Varying degrees of inflationary pressures, shifts in monetary policy, divergent growth trajectories, geopolitical events and a busy electoral calendar could complicate the outlook later this year. Resilient amidst rising interest rates, the U.S. economy continues to surprise, supported by a strong labor market. Despite this, the ongoing impact of higher interest rates could continue to weigh on economic growth later this year.
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