Q1 2024 Market Commentary + Outlook

Aldrich Wealth’s Nicole Rice, Partner + Chief Growth Officer, and Darin Richards, Partner + Chief Investment Officer, discuss Q1 market performance and what to anticipate in upcoming quarters.

The S&P 500 rose 10.6% during Q1 of 2024, with nearly all the index’s underlying sectors gaining thanks to robust consumer spending, better than expected corporate earnings, and the anticipation of interest rate cuts later this year. The Federal Reserve (Fed) held rates steady during Q1 as inflation proved stickier than anticipated but reaffirmed the plan to cut three times before year-end. International markets gained on the quarter, with the MSCI EAFE posting 5.8%, but trailed their domestic counterparts primarily due to a stronger dollar. Emerging markets, as measured by the MSCI Emerging Markets Index, increased by 2.5% during Q1, trailing developed markets as China’s real estate slump deepened. Fixed income struggled in Q1, with the Bloomberg US Universal Index ticking down -0.5% as rates rose after investors ratcheted down the number of rate cuts. The US economy continued to expand despite some cooling in the underlying data. The labor market remained robust, maintaining a historically low unemployment rate.

The S&P 500 gained 10.6% during Q1 of 2024 due to three months of solid growth. The large cap index continued to hit all-time high after all-time high thanks largely to a select few mega cap companies and AI advancements. Investors entered 2024 predicting the Fed would start cutting interest rates in March. However, as inflation readings came in higher than anticipated throughout the quarter, Fed officials explained they need more evidence that inflation is turning over before they begin the cutting cycle. In the March meeting, the Fed held interest rates unchanged but reaffirmed the plan to cut rates three times before year-end, likely starting in late summer. The labor market started to cool slightly in Q1 as layoff announcements hit levels not seen since the Great Financial Crisis, but job growth remained robust overall, with February marking the longest period of full employment on record, which is three years. Consumer spending continued to drive the economy despite the biggest drop in retail sales (which make up one third of all consumer spending) in 10 months in January. Spending bounced back later in the quarter as consumer confidence in the economy hit the highest level since July 2021. In March, the manufacturing sector grew for the first time in 17 months as production increased, a positive sign for the economy looking forward.

All but one of the 11 underlying sectors in the S&P 500 rose in Q1. Communication services led the charge, gaining 15.8%, largely driven by Meta. Energy was the second-best performer, returning 13.7%, with nearly all the gain coming in March on the heels of decreased oil supply and increased prices. Technology and financials were close behind, rising 12.7% and 12.5% respectively. Conversely, real estate was the only sector to post a loss (-0.6%), as rising bond yields pressured the income-oriented sector.

Large cap stocks handily outpaced small cap stocks in Q1, despite small cap outperforming in February and March. Additionally, growth stocks beat out value stocks in the Q1, continuing trends seen throughout much of 2023.

International developed markets significantly trailed their domestic counterparts throughout the quarter but still rose, with the MSCI EAFE Index closing out Q1 up 5.8%. A falling euro and yen dampened relative returns by over 4% due to rising US bond yields. Within the eurozone, business activity continued to shrink but at a slower rate, and the Purchasing Managers’ Index (PMI), an indicator of future business conditions, rose to an eight-month high (although still in contraction territory), signaling the economy may be stabilizing. Inflation continued to slow within the eurozone, and although the European Central Bank acknowledged the disinflation process was working, they left interest rates unchanged in January, noting the cutting cycle would begin later than investors had anticipated. Still, consumer sentiment in the eurozone improved throughout the quarter thanks to easing worries about energy. In the UK, wage growth slowed to the weakest pace in nearly a year, but business activity rose more than expected. The housing market picked up throughout the quarter and the PMI continued to rise, hitting the highest level in seven months and indicating the UK may be able to avoid a recession. In Japan, the country unexpectedly slipped into a technical recession (two consecutive quarters of negative growth) due to sluggish demand and fell behind Germany to the world’s fourth-largest economy. Inflation trended lower throughout the quarter however, and the yen weakened against the US dollar, prompting strong export performance and propelling the Nikkei 225 (a broad benchmark for Japanese stocks) to an all-time high. In March, the Bank of Japan increased interest rates for the first time in 17 years, but the yen continued to dip and closed the quarter near 34-year lows.

Elsewhere, the MSCI Emerging Markets Index increased by 2.5% on the quarter. In China, the largest constituent of the index, returns plummeted -10.6% in January, and although the country gained during the following two months, it was not enough to finish Q1 in positive territory, losing -2.2% on the quarter. Q1 began with China’s real estate crunch worsening, as Evergrande Group, previously one of the largest property developers in the country, was ordered to liquidate after racking up more than $300 billion in debt. Despite the People’s Bank of China (PBOC) cutting reserve requirements to curb the stock market selloff and stimulate the economy, investors indicated that a pickup in government spending, and more efforts to close the real estate selloff were needed to increase consumer confidence. Later in the quarter, tourism revenue surpassed pre-pandemic levels because of the Lunar New Year holiday and the PBOC injected $500 billion into the banking system. Further, as new home prices continued to contract, the PBOC ramped up support for the property sector with the biggest-ever cut to the key mortgage rate. This was the first cut since June and the largest reduction since a revamp of the rate rolled out in 2019. Despite these efforts, property sales extended declines throughout the quarter and manufacturing industries remained in contraction territory due to declines in production and exports. Alternatively, Taiwan was the top performing country of the index, gaining 12.4% over the quarter due to microchip and AI advancements. India held second place in Q1 as the country’s stock market topped Hong Kong’s to become the fourth largest in the world.

Over Q1, the Bloomberg US Aggregate Index slid -0.8% and the broader Bloomberg US Universal Index ticked down -0.5% as the Fed indicated a later-than-anticipated start to the rate cutting cycle due to stickier inflation.

The yield on the 10-year US treasury rose 0.3% during the quarter, ending at 4.20%. The yield curve remained inverted throughout Q1, with the 2-year yield persisting above the 10-year yield. Short duration yields, which are closely tied to Fed rate moves, increased as well, with the 2-year treasury rising 36 basis points and ending the quarter at 4.59%. The yield curve has been inverted for a record amount of time, more than 21 months. Although inverted yield curves tend to indicate recessions, recession fears are fading, and the Fed may have navigated a soft-landing.

US gross domestic product (GDP) grew at an annualized rate of 3.4% over the fourth quarter of 2023, the latest period for which data are available. As could be expected from the year’s trends, consumer spending drove the increase. Consumer confidence hit an 18-month high in January as displayed in the uptick of both goods and services purchased. The US economy has remained resilient and during the quarter, economists increased the US GDP forecast, anticipating the country to continue to outperform expectations in 2024.

Throughout Q1 in 2024, the labor market remained strong, notching the longest period of full employment on record, but several underlying data began to cool. Unemployment claims persisted near record lows, but the pace at which firms hired and increased wages slowed congruently as the rate at which employees quit decelerated. In February, companies announced the highest level of monthly layoffs since the Great Financial Crisis and the unemployment rate consequently ticked up, despite the economy adding more jobs than predicted. Any concerns of a wavering labor market were alleviated in March, however, as job growth increased well-above expectations and the unemployment rate ticked back down. Wage growth was contained over the quarter, spurring hopes that the US can expand employment without spiking inflation.

Although inflation has been moderating, it has proven to be somewhat stickier than anticipated. Both the Consumer Price Index and the Producer Price Index (key inflation measures) rose more than expected throughout the quarter, as high shelter prices weighed on consumers. Alternatively, the Personal Consumption Expenditure Price Index (PCE), the Fed’s favorite inflation measure, was in line with expectations, and headline PCE came in at the lowest level in three years. Still, the Fed noted the need for greater evidence that inflation is under control before cutting interest rates and reaffirmed the plan to cut three times before year-end, though with a later start date than investors had originally priced in.

Arguably, the Fed may have been able to thread the needle between lowering inflation and maintaining economic stability. Coming off the highest interest rates in nearly 20 years the US economy continued expanding in 2023. Looking forward, the International Monetary Fund (IMF) increased global growth projections, with the US’s resilient economy expected to lead developed markets. Despite US stocks looking slightly overvalued compared to long term averages, companies continue to beat earnings expectations, and interest rate cuts later this year could support higher prices. Looking toward the remainder of 2024, interest rate declines should benefit small cap stocks the most (which are trading at attractive valuations), and although value stocks are attractively priced compared to growth stocks, investors continue to exhibit a strong preference for growth.

Developed international stocks are trading at attractive discounts to domestic stocks, but investors continue to favor US stocks. Inflation is falling more rapidly in the eurozone though, which could support aggressive interest rate cuts by the European Central Bank and support higher valuations. Emerging market stocks are trading at historically attractive levels thanks to strong growth and under-control inflation exhibited throughout most emerging countries. However, the primary driver of emerging markets (and the second largest economy in the world), China, has experienced a decline in growth and a significant downturn in stocks, and without substantial stimulus from the government, will likely hold back emerging markets returns in 2024.

Bond yields should be near the peak and if the Fed begins trimming interest rates later in 2024, future returns should be relatively attractive. Longer duration bonds are well positioned and although short term yields are attractive, shorter-term bonds may underperform their longer-term counterparts as the rate cutting cycle unfolds and yields begin to fall. Defaults have been low despite tight credit spreads, and the probability of a 2024 recession has fallen significantly.

This information is for educational purposes and is the opinion of Aldrich Wealth LP (“Aldrich Wealth”).  Facts and figures are believed to be from reliable sources, but no liability is accepted for any inaccuracies. Nothing in this commentary should be construed as an investment recommendation. Past performance does not guarantee future results and all investments involve risk. Aldrich Wealth is an investment adviser registered with the U.S. Securities and Exchange Commission.