Global Market Review and Outlook

The market momentum that closed out 2023 continued unabated through the first quarter of 2024. Equity returns in the U.S. were the bright spot again, spurred by the prospects of tamer inflation, better economic growth, and lower interest rates. The S&P 500 rose 10%, its largest first-quarter advance since 2019. International equities mostly followed suit. Developed markets (ex-U.S.) increased 6%, with emerging markets advancing a more modest 2%, held back by China’s tempered economic policy amid heightened real estate challenges. Fixed-income returns were slightly negative as interest rate yields increased during the quarter, causing valuations to fall. Below is a table of select asset class returns for the first three months of the year.

Source: Factset

The performance of the U.S. equity market continued to be driven by the “Magnificent Seven” mega-cap technology-focused companies. While these stocks accounted for roughly 40% of the total gain in the S&P 500 during the first quarter, there was meaningful divergence among the constituents’ returns (unlike last year). Nvidia (+80%) and Meta (+37%) continued to soar, while Tesla (-35%) and Apple (-11%) struggled. Still, despite volatility of the top performers, the S&P 500 benchmark registered its first record high in over two years in January and reached multiple new highs through the end of March. The same cannot be said about the Russell 2000 Index, which consists of U.S. small-cap businesses. This index is up modestly on the year but is still 17% below its most recent peak in 2022. The return disparity is not without merit. The larger-cap companies have grown earnings faster and are generally more profitable than their smaller brethren, who have more acutely felt the impact of higher interest rates and have struggled to grow profits.

A strong start to the year typically portends healthy returns for the full year on balance. Looking back almost 100 years, positive returns in January (January 2024 was +2%) are followed by gains for the entire year 80% of the time. Moreover, dating back to 1950, when both January and February increase (as they did in 2024), full-year advances average near 20%. Add to that generally positive returns during election years (like this one) and we have the potential for another fruitful year, should historical precedence persist.

Historical anecdotes aside, the ultimate direction of the markets this year (and every year) will be determined by the path of corporate profits, which in turn are driven by economic activity. To that end, the economic outlook in the U.S. has improved meaningfully. Most estimates have underlying inflation falling below 3% as supply-side fixes have been implemented and better labor supply has eased wage pressures. Lower inflation likely means interest rates have peaked, relieving pressure on the balance sheets of corporations and individuals. Lower inflation and easing money supply combined with full employment and healthy consumption leads many to believe that the often-elusive economic “soft landing” (slowing growth, but still positive) is within grasp this go-around. The markets certainly believe it is possible. Consensus GDP estimates for the year are hovering around 2%, and estimates for corporate profit growth are a heady 10%. Valuations, however, reflect this promising outlook and investor optimism abounds.

As we think about risks in 2024, perhaps it is these elevated expectations that give us the most consternation, rather than threats to the economic outlook. We are generally favorable on the economic prospects for the year but worry that a misstep relative to the current optimism could result in some volatility, especially in equity markets. The timing of interest rate cuts also remains a key uncertainty. The market began the year pricing in six rate cuts. Consensus now stands at three, with more recent attention given to the possibility of zero cuts. Given the impact that interest rates have on asset valuations (as we experienced in 2022), the further the Fed delays rate cuts, the more vulnerable today’s elevated asset prices become.

Despite these risks, we continue to view equities favorably. Valuations have expanded—especially in larger-cap companies–but there remains a significant subset of more attractively valued smaller and midsize businesses that are poised to benefit from the combination of an economic soft landing and lower interest rates. We are actively seeking investments in this area to deploy capital where prudent. International equities continue to tempt given their steep valuation discount to U.S. equities, but we remain patient in deploying significant new investments outside the U.S. given the meager expected future earnings growth.

Within fixed income, we continue to find good value in U.S. Treasuries. With annual yields well in excess of the rate of inflation, the opportunity to earn real returns remains very much in play. With credit spreads still very tight for investment-grade issues, the risk/return trade-off on U.S. Treasuries is quite attractive, in our opinion, and we will continue to focus on these debt instruments in portfolios where income and stability are important.

As we head into spring and summer, the investing landscape will undoubtedly remain fluid. The presidential election alone could certainly have unpredictable effects on the markets. As always, however, we will remain steadfast in our approach, not reacting to the topic du jour, but rather focusing on longer-term trends and investable themes to help grow your capital for the future.

Please reach out with any questions or comments; we would love to hear from you.

Regards,

John, Cam, Lauren, and team