The S&P 500 gained more than 10% in the first quarter, the best start-of-year since 2019. Market gains followed stronger-than-expected corporate earnings that offset disappointment about higher-than-expected inflation. Strong economic growth had the opposite impact on bonds, with yields rising amidst diminished rate-cut projections.
At Nixon Peabody Trust Company, we continuously evaluate real-time economic data and short- and long-term forecasts to build customized strategies that grow your money. If the flood of financial headlines leaves you a bit confused, you can be confident that we’ve designed a portfolio-positioning strategy to maximize your success.
First Quarter in review
The S&P 500 rose 10.6%, with communications and technology stocks leading the way. Investor fears of recession faded, contributing to a quarter in which the S&P 500 reached 22 all-time closing highs, and more than half of S&P 500 stocks reached new highs. Bond prices fell in Q1, with the Bloomberg Aggregate Index losing 0.8%. 10-year Treasury yields rose to 4.2%.
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Q1 |
|
Equity |
|
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MSCI All Country World Index |
8.3% |
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S&P 500 Index |
10.6% |
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NASDAQ Composite Index |
9.1% |
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Russell 2000 Index |
4.8% |
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MSCI World ex-U.S. Index |
5.6% |
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MSCI Emerging Markets Index |
2.2% |
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Fixed Income |
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Bloomberg Aggregate Index |
-0.8% |
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Bloomberg 1-5 Year Gov/Credit |
0.1% |
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Bloomberg Municipals |
-0.4% |
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Bloomberg 3-Month T-Bill |
1.3% |
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Communications, energy, and technology were the top-performing S&P 500 sectors in Q1; real estate was the only sector with negative returns.
US small company and non-US stocks both gained in March but still trailed US large-cap stocks for the quarter.
Economic growth
Investor sentiment to start the year was dramatically different than it was a year ago. At the start of 2023, investor debate was focused on the timing and severity of a recession that never materialized despite bank failures, geopolitical events, and restrictive monetary policy. Consensus expectations at the start of 2024 were for the US economy to experience a soft landing in which economic growth would slow but not stall. During the first quarter, however, economic growth expectations rose amid corporate earnings growth, still-strong employment, and rising productivity.
Economic growth outside the U.S. was less robust, with the Euro Area and China notably weaker than expectations. Economic growth may have bottomed in both regions, which could be a recipe for a rebound in stock prices, given low valuations and pessimistic investor sentiment.
Interest rates
The upward revision of economic growth expectations during the first quarter also caused a major adjustment to monetary policy forecasts. The year began with investors expecting six rate cuts during the year. Given higher-than-expected economic growth, strong March job growth, and stickier inflation, expectations for rate cuts have been cut in half. Investors are split on when the first cut will come, with mixed predictions for June or July. Despite a less aggressive outlook for rate cuts, Fed Chair Jay Powell’s suggestion that recent inflation data has not changed the Fed’s view on the path downward for inflation largely counterbalanced investor disappointment. Investors were also comforted by the heightened emphasis on protecting the economy from a slowdown in growth.
Inflation
February’s CPI reports were higher than expected, disappointing those expecting a smooth path to 2% inflation. Housing-related inflation remains high; apparel, used cars, and airline fares were among the other categories that kept inflation higher than expected.
With the Consumer Price Index considerably higher than pre-pandemic levels, the elevated costs for everyday goods create financial stress for many households and may be an economic headwind in 2024.
Artificial intelligence
AI continued to boost the fortunes of perceived winners in the first quarter, with stock market beneficiaries spreading beyond Nvidia and Microsoft to a wider universe of cloud-computing platforms, hardware manufacturers, and networking providers. Investors will continue to assess the pace of AI adoption while seeking insight into the range of its possible applications. We expect heightened stock volatility as investors make judgments about which companies will lead and which will lag in the AI race.
Portfolio positioning
The consequence of the market rally in 2023 and during the first quarter of 2024 is that some of our holdings represent a higher weight in client portfolios than we think is appropriate, given their valuations and growth prospects. We view this as mostly a good “problem,” but the need to reposition our stock holdings has prompted us to be more active in trading than we usually are. We have also been repositioning our mutual fund and ETF holdings, particularly in the US small/mid-segment and the non-US equity segment. We expect these market segments will benefit from an eventual rotation from last year’s big winners, and we want to capitalize on the abundant opportunities we see. Unfortunately, this portfolio repositioning will result in somewhat higher-than-ideal capital gains realization during the first half of 2024.
With inflation receding and interest rates at higher levels than has been the case for much of the past 15 years, high-quality short- and intermediate-term bonds are an important segment of investor portfolios. We are securing higher rates by selectively investing in intermediate-term bonds, as today’s high money-market rates are not likely to last indefinitely.
If you have questions or comments about your personal portfolio or any of the trends and strategies we’ve outlined here, please reach out to us or any member of your Nixon Peabody Trust Company team. We’re always happy to hear from you.