Market Performance, Global Economic Trends, and Sector Analysis
The S&P 500 Index rose by 10.55% in the first quarter of 2024, finishing the period at all-time highs and closing the day at records on roughly 40% of the trading days in the quarter, as per Goldman Sachs. The so-called Magnificent Seven stocks once again outperformed the broader market, though the performance of those seven individual stocks did have more dispersion than in prior quarters. Small and mid-cap indices, while lagging in Q1, have still outperformed large caps over the past five months, reflecting a longer-term positive trend. Economic activity remained robust, and predictions for U.S. GDP growth and consumer spending exceeded initial forecasts. Although the Federal Reserve is still forecasting more accommodative monetary policy by the end of 2024, persistent inflation has led to some question over the pace and timing of rate cuts. The Fed is monitoring stronger-than-expected economic growth and job market resilience as well. As a result, market expectations shifted over the quarter from up to six rate cuts this year to just three, with the first cut now expected to be delayed until at least June.
International equities continued their late 2023 momentum from the global risk asset rally but lagged U.S. equity markets in the first quarter of 2024. The MSCI EAFE Index posted a 5.94% gain in the first quarter, while the MSCI Emerging Markets Index returned 2.41%. China’s economic woes continued to start the year and these persistent issues have weighed on international markets, particularly E.M. Japan was one of the best performing equity markets in the world in the first quarter, as the Topix gained 18.04%. Overall though, most international economies lagged behind the U.S. and continued domestic economic strength resulted in a stronger U.S. Dollar. The dollar’s rise against most foreign currencies marks a reversal of the downward trend in the final quarter of 2023, but is in line with the currency’s broader strengthening since the pandemic.
In fixed income markets, the first quarter was a somewhat difficult period due to a combination of factors, most notably the potential delay in rate cuts. While lower rates would boost bond prices due to the inverse relationship between price and yield if the Fed were to cut rates, investors are coming to grips with the idea that the central bank’s fight against inflation may not be over just yet. As a result, yields generally rose, with the front end of the U.S. Treasury curve remaining elevated and the longer end of the curve seeing a notable increase. The 10-year Treasury yield rose from 3.89% at year-end to 4.20% at the quarter’s finish. The three-year Treasury yield rose most, increasing by about 0.40% over the course of the first quarter. The Bloomberg U.S. Aggregate Bond Index posted a slightly negative return in the quarter, and high yield credit outperformed for both corporate and municipal bonds.
Outlook and Key Considerations
Looking ahead, investors will be closely monitoring economic indicators to assess their impact on central bank policies and the resulting shifts in market dynamics. The persistence of inflation, continued strength of the U.S. economy, and resilience of the labor market has resulted in the market repricing 2024 interest rate policy expectations, from roughly six 25-basis-point cuts to start the year down to three cuts now. The interest rate cuts are also expected to be pushed back to either the end of the second quarter or into the third quarter. However, significant amounts of uncertainty remain around this forecast, and a Federal Reserve that has vowed to remain data-dependent could change course again in the coming months. Still, a ‘soft landing’ remains a significant possibility, and the market seems unperturbed by the potential for delays in the rate cut path.
Inflation readings, particularly the closely-watched Consumer Price Index (CPI), will have a large impact on markets moving forward. Any hot inflation prints, meaning CPI reports where inflation exceeds market expectations, will likely be a negative for the market. Alternatively, if inflation were to fall more rapidly than expected, markets would likely react positively given the implications for more accommodative Fed policy. Here at Condor, we anticipate that inflation may be on the more persistent side, and want to remain pragmatic by not pricing in too many rate cuts this year.
China, which has been struggling with a relatively poor economy, is seeing promising signs of a rebound. The government’s supply-side economic stimulus measures have brought their growth projections back on track, a welcome sign for the world’s second-largest economy. The resurgence in China could provide a headwind to the global battle against inflation, however, as government projects drive up demand for commodities and could create a new leg of price pressures.
One of the reasons for the market’s resilience thus far has been the outsized influence of a few tech names, the Magnificent Seven. Generally, a broader market is healthier, so the ability of other stocks to take up leadership and drive the next leg of growth would be welcome. Energy and financials have started the year out very strong, and industrials and materials stocks have posted good performance as well. Even within the Mag Seven, we have begun to see some dispersion this year, with Tesla and Apple down notably year-to-date.
Moving forward, Condor will continue to focus on the long-term needs of our clients and prioritize quality. We will continue to seek opportunities as they present themselves, whether trimming from equity at market highs, rotating out of high yield bonds when spreads are exceptionally tight, or buying a dip in a position we have conviction in when the market becomes overly pessimistic.
