The 2023 rally wouldn’t quit as the first three months of 2024 seemed to be an extension of the previous 12. U.S. Large Caps continued to be the best performers with other equity asset classes lagging.  Bonds turned in a poor quarter as interest rates rose 0.3% leading to a slight drop in bond prices. While it’s never fun to see a part of your portfolio decline, this should be encouraging to investors as it represents a return to stocks and bonds being inversely correlated. This phenomenon is what allows balanced investors, (retirees, DB Plans, and non-profits) to realize portfolio returns that exceed the average of their components.

Price Action:

The march higher in stock prices was steady this quarter with the S&P 500 gaining in each of the three months. The meat of the rally was driven by appreciation in Artificial Intelligence Stocks (Nvidia + 84%) and chip makers, while other darlings from 2023 underperformed (Tesla -29% & Apple -11%). 

The primary driver of equity performance was strong corporate earnings and positive guidance for the ensuing 12 months. This was enough to overcome hotter than expected inflation readings. The CPI report surprised on the upside in 2 of the 3 months for a combined 1% growth in the quarter (annualizing 4%). The Fed’s preferred gauge of Core PCE matched expectations each month but still accrued 0.9% (3.6% annual) during the quarter.

  • These inflation readings moved the market’s expectations from 5.5 rate cuts in 2024 down to 3 rate cuts. In fact, on January 1st the market was giving an 88% chance of the first interest rate cut to take place in March – we already know that didn’t happen.
  • The Technology and Communication sectors continued to shine, up 13% and 15% respectively. They were joined by the more value-oriented sectors of Financials and Energy, each up 13%.
  • REITs were the biggest laggards, finishing the quarter down 1% as higher interest rates for longer worried investors.
  • Emerging markets continued to lag, finishing the quarter up 2%, in large part due to China’s underperformance (-2%).
  • Bond duration was penalized with long-dated treasuries dropping 5% for the quarter while short-term corporates and cash gained 1%.
  • Commodities and stores of value were some of the best performers in the quarter. Oil was up 17%, gold was up 8%, and Bitcoin was up a whopping 41%.
  • Housing prices saw an unexpected decline dropping 0.7% for the last three months we have data.


Looking Forward:

In the first quarter, strong corporate earnings were able to overcome hot inflation numbers and changing expectations for Federal Reserve action. That tug of war will likely take place again this quarter and continue for 2024. While we do expect equities to continue to build wealth in the long run, don’t expect the steady upwards climb that we’ve seen over the last 15 months to continue.

Conflict between Israel and Iran has grabbed news headlines recently, but the market is treating it as a non-event. Hopefully the market will prove correct and the situation in the middle east will not intensify.

Lastly, we have an election in November. 15 months ago, Ron DeSantis was the odds-on favorite in betting markets, but someone forgot to tell that to the voters! Biden spent most of ’23 as the favorite until strong polling propelled Trump ahead of him in the 4th quarter. But recently, a reverse in polling now has Biden as a small favorite in betting markets. What does this mean for the stock market? Not much! Elections are notoriously difficult to predict, and despite what politically motivated people may tell you, the person in the White House is typically much less influential than the Chair of the Federal Reserve.