Q1 2024 Insights
Global equity markets posted strong gains for the first three months of the year, with the S&P 500 Index recording its strongest first-quarter return since 2019. A resilient U.S. economy, ongoing enthusiasm around generative artificial intelligence (AI), and growing expectations for interest rate cuts were the main drivers of returns between January and March.
However, higher-than-expected inflation prints in April led the Federal Reserve to reaffirm its position to maintain interest rates at current levels, at least until the economic data warrants policy easing. Investor sentiment was quickly dampened as blissful expectations of six (or more) rate cuts for 2024 fell back to one rate cut (if any). Volatility spiked in both bond and equity markets, with many indices giving up most of their year-to-date gains in just two weeks, before recovering by the end of the month.
While the secular trends of generative AI and supply chain “friend-shoring” will likely continue, we would expect volatility in interest rates (and by extension bond and equity markets) to remain elevated for the foreseeable future. On the one hand there are positive economic catalysts that may make it difficult for the Fed to ease off its contractionary policy stance (e.g., a strong economy, tight labor market, sustained real wage growth). Yet on the other, there are risks that could throw uncertainty into future growth prospects (e.g., geopolitical risk, earnings disappointments amid rising costs, a strong dollar putting pressure on developed and emerging economies alike).
As always, we (and the outside managers we employ) aim to take advantage of these moments of volatility to rebalance portfolios. Growth stocks may be more expensive than the rest of the market, yet so far, their earnings have kept pace with their appreciated share prices. What is less certain is if they will be able to maintain their recent stellar performance quarter-after-quarter, year-after-year. Periodically (such as in mid-April), the market questions the resiliency of present earnings into the future and provides opportunities to buy into quality, long-term holdings at more sober valuations. The same is true in fixed income. As rates bounce around while the market tries to predict future growth, inflation, and borrowing costs, we have the chance to pick up high-quality bonds at much lower prices.¹
Q4 Financial Markets Performance
Equities
U.S. stocks advanced, as corporate earnings came in stronger than expected amidst sticky inflation figures (see Exhibit 1). Early in the first quarter, prospects of a nearing Fed rate cut were still strong, which boosted returns. Rate sensitive sectors such as communications services and information technology were top performers early in the quarter and held onto their gains better than other sectors as prospects for that approaching rate cut rapidly diminished in April.
Energy and financials also performed well, the former benefiting from rising oil prices amid geopolitical turmoil, and the latter from the possibility of higher-for-longer interest rates. Meanwhile, real estate and utilities lagged. Large caps generally outpaced mid- and small caps, and growth outperformed value as several mega-cap tech stocks continued to lead markets higher.
Non-U.S. developed markets moved higher as well, benefiting from growing optimism about possible mid-year interest rate cuts in Europe, positive economic data, and upbeat corporate earnings. In the Eurozone, the technology sector advanced strongly over unrelenting demand for AI-related technologies. Improvements in the region’s economic outlook helped financials, consumer discretionary, and industrials post gains for the quarter. U.K. stocks also performed well, as inflation figures came in weaker than expected. Historic weakness in the Japanese yen helped local stocks advance (even in U.S. dollar terms). Exuberance around generative AI and solid corporate earnings also boosted sentiment.
Stocks in emerging markets generally underperformed their developed market peers over the quarter. Chinese stocks continued to lag despite some stimulative policy measures. Other Asian markets posted mixed results as investors were cautiously optimistic about China’s economic prospects and the subsequent knock-on effects for the regional economy. Strength in the Indian rupee helped local stocks advance, while positive AI prospects drove Taiwanese equities higher. Equity markets in South Africa and Brazil lost ground due to political uncertainty and profit taking, respectively.
¹ Reminder: bond prices and yields have an inverse relationship.
