Following the robust finish of 2023, the first quarter of 2024 was a record breaking one for markets. While the stock market saw several intermittent selloffs, it continued to march higher as resilient corporate profits and a strong labor market renewed hopes that the economy will avoid a recession. The S&P 500 Index wrapped up the quarter with a 10.5% gain, marking its strongest first quarter performance in five years. Along the way, the Index posted 22 record high, 17 of which were recorded during the first 50 trading days of 2024. Additionally, all major U.S. stock indexes recorded significant quarterly advances and, more importantly, these advances were achieved with a healthier level of breadth. Large capitalization stocks led the advance, and growth stocks once again outperformed the value-oriented ones.
Ten out of eleven sectors of our domestic economy posted positive returns in the first quarter. In addition, five of those sectors beat the S&P 500 Index. The star of the quarter was the energy sector, which returned double digits as energy prices rose. The other top sectors were the same as in 2023 – communication services, information technology, financials, and industrials. Despite the defensive sectors continuing to lag the S&P 500, the quarterly performance was positive for all of them except real estate, as high interest rates continued to weigh on the sector.
Investors were happy with the quarterly performance around the world, as most of the developed markets tracked by MSCI Index ended the first quarter of 2024 in the green.
The Bloomberg U.S. Aggregate Bond Index, which acts as a proxy for the intermediate term investment grade bond market, decreased slightly as the yields increased across most of the Treasury curve. Intermediate term bonds continued to be an attractive investment opportunity as the yield on the 10-year Treasury ended the quarter at 4.8%.
Two years ago, the Fed started one of the most aggressive interest rate hiking campaigns in history aiming to slow the U.S. economy to suppress inflation. Yet, our domestic economy continued to defy expectations. Real gross domestic product (GDP) increased at an annual rate of 3.4 % in the fourth quarter of 2023, according to the final estimate released on March 28, 2024. This solid growth reflected increases in consumer spending, federal, state, and local government spending, exports, and residential fixed investments.
The job market continued its long stretch of growth in the first quarter, with payrolls scoring their largest gain in more than a year in March. However, wage increases have been decelerating from the intense rates of growth seen in the aftermath of the pandemic, hopefully exerting a less upward pressure on prices.
One of the most-notable developments of the first quarter was a new rebound in manufacturing. Economic activity in the sector expanded in March after contracting for 16 consecutive months, according to the ISM Manufacturing Purchasing Managers Index. The Conference Board Leading Economic Index rose in February for the first time in two years, while still suggesting some headwinds to growth going forward.
Economic growth has remained resilient, but the pain of high rates has begun to pressure some areas of the economy. Credit-card delinquencies have ticked up as interest rates on accounts have risen to multi-decade highs. Consumer confidence stalled, moving sideways with no real trend to the upside or downside for the last six months. The housing market also came under renewed pressure with mortgage rates rising above 7%, the highest level since late 2023.
Inflation remained stubbornly elevated with first quarter 2024 data coming in hotter than expected. This reading forced the market and analysts to scale back the number and timing of the Federal Reserve’s interest rate cuts projected for 2024. Some of them even changed their expectations from “when” to “if.” While the market originally reacted negatively to this development, it is worth noting that during the previous periods of the Fed holding interest rates unchanged for over 100 days, the market usually moved higher. For example, the longest holding period of 2006-2007 resulted in 22% rise of the S&P 500 Index.
As we turn the page on the first quarter and look ahead to the rest of the year, we believe the Fed will be successful guiding the U.S. economy to a soft landing. With global growth expected to stay positive and European and U.S. central banks likely to shift toward cutting rates, the stage is set for a favorable market environment for equities. We see no reason to shift toward a more aggressive or more conservative approach, but we intend to navigate this promising but unpredictable market with prudence and balance.
Dumont & Blake Investment Advisors, LLC
March 31, 2024