By: Darren W. King | Wealth Management
Equity markets staged a historic rally in the first quarter, as economic growth surprised to the upside and financial markets began to anticipate the Fed cutting rates in 2024. The S&P 500 gained 10.55% in the 1st quarter, the best performing first quarter since 2019. The Technology-heavy NASDAQ was up 9.32%, while the DOW Jones Industrial Average was up only 6.13%. The Russell 2000 Small Cap Index finished the quarter up 5.17% over the same period. International developed market equities, as measured by the Morgan Stanley Capital International Europe, Australasia, and Far East Index (MSCI EAFE), closed the quarter up 5.83% in US dollar terms and up 9.96% in local currency. The MSCI Emerging Markets Share Price Index closed 1Q2024 up 2.13% in US dollar terms.
2024 brought a broadening of market returns, with the communication services and energy sectors overtaking technology as the top returning sectors. S&P 500 sector results through 3/31/24: Communication Services 15.82%, Energy 13.68%, Technology 12.68%, Financials 12.45%, Industrials 10.97%, S&P 500 10.55%, Materials 8.95%, Health Care 8.85%, Consumer Staples 7.52%, Consumer Discretionary 4.98%, Utilities 4.56% and Real Estate -.55%. Amazon, Meta Platforms, Microsoft and Nvidia still accounted for 50% of the S&P 500 quarterly return, as performance remained concentrated in mega-cap technology. Value, defensive, and interest-rate sensitive stocks posted less impressive returns, but still participated in the stellar first quarter returns.
Based on current consensus earnings forecasts, the forward 12-month P/E ratio for the S&P 500 is 20.9X, more expensive than the ten-year average P/E of about 17.7X. Currently, the market is estimating 11% earnings growth on 5% revenue growth in 2024. Average equity strategists’ bottom-up price targets for 2024 are at 5614, 8% higher than current trading levels. We are expecting a more normalized return environment for equities for the remainder of 2024 with valuations needing to also normalize after the strong third and fourth quarter rally. However, we do see a continued broadening of equity returns out of technology and into other areas of the market that have not participated as dramatically in the equity rally. Part of the first quarter rally in stocks can be attributed to earnings estimates for 2024 moving higher since the end of last year. The level of interest rates will continue to be the main determinate of equity returns in 2024, especially with the market expecting more interest rate cuts in 2024 than what the Fed has telegraphed. This is especially true with economic growth remaining resilient, while inflation is not moving quickly to the 2% level than the fed would like to see.
During their March 2024 meeting, the Federal Reserve kept interest rates steady, and set the table for several cuts in 2024 and beyond. However, market expectations at the end of 2023, for 150 basis points of interest rate cuts in 2024, have quickly moved closer to Fed guidance of 75 basis points of interest rate reduction. Through March, the Federal reserve have initiated eleven interest rate hikes, as the fed funds rate now sits at 5.25%-5.50%, the highest level since 2007. Latest economic projections show an economy that is growing at much higher levels than late 2023 projections, but with slightly higher inflation remaining. GDP is estimated by the Fed to be 2.1% in 2024, revised up from 1.4% GDP growth estimates assumed in December. As measured by the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures Index, inflation is estimated to end 2024 at 2.6%, slightly higher than earlier projections at 2.4%. As of March 1, the fixed income markets place a first rate cut by the Fed in June at slightly less than 50% odds; a drastic move from late 2023 when many saw the Fed reducing interest rates as early as March of this year. While equity markets rallied in the first quarter on signs of improving economic growth, the bond market sent interest rates higher on signs the economy is strong enough for higher interest rates for longer. As of April 10, 10-year treasuries now yield 4.50%, up from 3.88% at the end of 2023.
The 10-year treasury staged a significant correction through March of 2024, starting the year at 3.88% and ending the quarter at 4.20%. Longest duration bonds underperformed shorter duration issues as yields rose over the course of the first quarter. 20+ year treasuries were down 3.83% in the first quarter, while intermediate treasuries were down .36%. In a risk-off trade, higher credit quality outperformed the lowest credit quality issues. Aaa rated bonds within the Barclays U.S. Aggregate Index were up .02% in the first quarter, while Baa rated bonds lost.19% during the same period.
The Bloomberg Dollar Spot Index strengthened 2.68% in 2023, as global markets now see higher interest rates for longer for the US, as compared to their trading partners. Light crude oil futures rose 16% in 2024, with WTI oil futures rising to $83.17 from $71.65 at the end of 2023. 30-year mortgage rates rose from 6.99% at the end of 2023 to 7.25% by the end of the quarter, while 30-year treasuries rose 31 basis points from 4.03% at year-end 2023 to 4.34% at the end of the first quarter.
According to the Bureau of Labor Statistics, the March employment report showed 303K jobs gained during the month. This was appreciably above earlier estimates for 214K new jobs created during March and was the highest monthly number in nearly a year. The March jobs number reported unemployment at 3.8%, slightly above the February 2020 pre-pandemic rate of 3.5%, a 50-year low. The labor force participation rate in December was 62.7%, up from the pandemic trough of 60.2% in April of 2020. For March, hourly earnings rose 4.1%, below the recent wage inflation numbers that were averaging greater than 5% for most of 2023, indicating a slight cooling in wage inflation. The still hot jobs market, despite the Fed’s hiking policy, is keeping pressure on the Fed to hold rates at current levels, probably longer than markets have been suggesting. While the Fed has indicated 75 basis points of cuts to interest rates in 2024, the labor market appears to be strengthening, not slowing, and risks delaying Fed easing.
Retail sales in February increased .6% from the prior month, rebounding from slower consumer spending in January, as consumers continue to spend online and at bars and restaurants. Annualized retail sales were up 1.5% over the past year, compared to the consumer price index’s measure of inflation up 3.2%. Gasoline station sales aided discretionary spending over the past year as gasoline prices fell 4.5%. However, energy prices have risen so far in 2024, potentially depleting future discretionary income. Department store sales were down 4.4% from the prior year. E-commerce and mail-order houses ended the 12-month period with a 6.4% sales gain. Auto sales were up 1.2% from the prior year. Restaurant spending was up 6.3%, furniture store sales were down 10.1%, health care spending was up 1.7% and clothing and accessories were up 1.3%. On another positive note, food costs were only up .2% from the prior year, well below current year over year inflation numbers as supply chains are recovering from the pandemic. Despite a return to spending on restaurants and services since the pandemic shutdowns concluded, we expect real consumption growth to slow over the coming months, especially for big-ticket items related to housing. However, consumer spending on discretionary items remains resilient and better than most estimates coming into the year.
We are expecting a more normalized return environment for equities for the remainder of 2024 with valuations needing to also normalize after the strong third and fourth quarter rally. However, we do see a continued broadening of equity returns out of technology and into other areas of the market that have not participated as dramatically in the equity rally. Small capitalization and international equity valuations remain attractive compared to large capitalization peers. Part of the first quarter rally in stocks can be attributed to earnings estimates for 2024 moving higher since the end of last year. The level of interest rates will continue to be the main determinate of equity returns for the remainder of 2024, especially with the market expecting more interest rate cuts in 2024 than what the Fed has telegraphed.
Within fixed income markets, interest rate and fed policy have changed dramatically since the end of the first quarter. Ten-year treasury rates are now approaching November 2023 levels, currently at 4.50%, up 30 basis points from quarter-end. Interest rate traders’ conviction for 3 quarter-point rate cuts from the federal reserve in 2024, are fast approaching 2 quarter-point cuts. What we now see, is a higher flat period at current interest rates, with a slower fall from current interest rate levels. Inflation remains sticky as this 3% CPI level and the economy has expanded since the start of the year. While interest rates will fall over time, we see current interest rate levels as an opportune period to extend portfolio duration, invest excess cash in fixed income markets, or take some profits from equity portfolios to add to fixed income exposure.
As always, we appreciate the opportunity to assist you in meeting your investment goals. Please let us know if you have any questions regarding your account or the capital markets.
Click here to read the Q1 2024 Market Summary.
Non-Deposit Investment Services are not insured by FDIC or any government agency and are not bank guaranteed. They are not deposits and may lose value.
_______________________________________
Data Sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Dept. of Commerce (GDP, retail sales, housing); Institute for Supply Management (manufacturing/services). Factset (S&P 500 statistics); Performance: based on data reported in Bloomberg (indexes, oil spot prices, foreign exchange); News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources, such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied upon as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.