Quarterly Market Review 2024 Q1

2024 Q1 Quarterly Market Review

Q1 Quarterly Market Snapshot

The first quarter of 2024 saw gains across U.S., international, and emerging market stocks,  and down markets in global real estate and U.S. bonds. Perhaps most significantly, inflation numbers have continued to be sticky and come in higher than expected, which has reduced the outlook for interest rate cuts this year. Coming into 2024, five rate cuts were expected, beginning in March. After last week's inflation report announcement (Consumer Price Index at 3.5%), expectations are now closer to 2-3 rate cuts over the next 1-2 years. A few interesting data points:

• The U.S. stock market was up 10% in Q1, with value stocks narrowly outpacing growth stocks.

• S&P 500 hit a new all-time high in March.

• The Federal Funds rate has remained unchanged so far in 2024, with fewer and later cuts now expected. Current rates are still at 5.25%-5.5%.

• The yield curve remains inverted, meaning the 2-year Treasury yield is still higher than the 10-year Treasury yield. This is not a normal, long-term status, so we do expect this to change in the future.

• Continued upward pressure on inflation, coupled with geopolitical uncertainties, drove oil prices up and bond prices down. 

• U.S. bond yields continued their upward trend while prices fell (down 0.8%), with long-term bonds hit hardest.

• Following a strong Q4 (+15.5%), global real estate underperformed in Q1 as interest rates remained high (down 1.2%).

• New rules allowing exchange-traded funds (ETFs) to own bitcoin led to a new all-time high and 60% gains in bitcoin in Q1.

Below is a snapshot of key top-line economic indicators:

U.S. Stocks

The U.S. stock market had its best first quarter in five years, driven by gains in technology, financial services, and energy sector stocks. The market is up nearly 30% in the last 12 months. Despite no shortage of factors that could have caused tougher headwinds - most notably, inflation and geopolitical concerns - U.S. stocks posted a strong start to the year.  

Artificial Intelligence (AI) continues to dominate market headlines and propel large-cap tech stocks, particularly semiconductor and computer hardware companies that are most likely to benefit from it. Technology rose by 13%, led by big gains from companies like Nvidia (NVDA +82%), Microsoft (MSFT +12%), and Meta (META +37%). While there are some concerns that the U.S. stock market gains have been overly concentrated in a handful of tech giants like these, value stocks actually outperformed growth stocks, gaining 8.4% in Q1.

U.S. real estate stocks were down 0.7% due to persistently high interest rates. Notably, in March, the National Association of Realtors agreed to a landmark settlement that will change the long-standing commission-based structure for how real estate brokers are paid. This is expected to decrease the cost of buying and selling a home by eliminating the standard 6% commission, based on the purchase price, to a new model where home buyers and sellers can negotiate agent fees and commissions upfront. 

International Stocks

International markets outside of the U.S. posted positive returns for the quarter, up 5.6%, outperforming emerging markets, which was up 2.4%. As in the U.S. market, developed market equities outpaced their value counterparts, with growth stocks returning 10.3%.

European equities lagged behind the U.S. and Japan, ending the quarter on a good note despite dampening economic growth predictions. Some of the late quarter upturn may be attributable to cheaper valuations and global investors looking to diversify from the concentration risks in the U.S. market. The U.K. economy has been struggling, and was confirmed to have been in a recession for the last half of 2023. While it's too soon for official data, there are signs of a sufficient enough recovery that the recession may already be over. 

The best performing market of Q1 was Japan, which ended its 8-year streak of negative interest rates. Japan's central bank voted to increase interest rates for the first time in 17 years, finally pushing rates back into positive territory. China was among the worst performers due to geopolitical impacts on exports and deflationary impacts on their domestic real estate market, dragging down emerging market returns. 

Fixed Income

Coming off an impressive rally in Q4, the bond market in Q1 posted mixed results, driven by ever- changing speculation around the Fed's plans to lower interest rates. The Federal Funds rate, which remains at 5.25%-5.50%, continues to be the highest it has been since prior to the financial crisis in 2008. The Fed has held off on making rate cuts with Consumer Price Index (CPI) reports continuing to come back with higher inflation than expected, and with each monthly report has come a new set of predictions (and bond market volatility). Long-term bonds have been hit hardest, as the longer duration makes them more sensitive to changes in interest rates (real and expected). For the time being, the Fed has indicated they will likely continue to hold interest rates steady, despite inflation remaining above its 2% target. 

The yield curve (measured as the difference between 2-year Treasury yields and 10-year Treasury yields) has now been inverted for nearly six consecutive quarters (since July 2022). The degree of the inversion has remained relatively constant over the past year, despite bond market volatility. 

The inverted yield curve means that the market expects economic and inflationary activity to decrease in the future. Economic strength and inflation above the Fed target of 2% has pushed that expectation for a slower economy down the road.