Spring 2024 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
Momentum Continues
The first quarter of 2024 was the best for stocks since 2019, with the S&P 500 gaining 10.4% and reaching a new all-time high of 5,254. Market strength has continued unabated since the lows of last October with a one year rolling return for the S&P 500 of 34%. Large-cap stocks have led market returns with small-cap stocks lagging by a wide margin since diverging from large-caps in March of 2021. Small-caps have returned only about 60% of large-cap returns since that time. During the first quarter, only five of the Magnificent 7 continued to sustain market leading returns. This included Nvidia’s dominating gain of 82%, which was offset, in part, by first quarter losses for Tesla and Apple. So far, the stock market rally has been broader than in 2023 with the communication services and energy sectors leading the technology, financial, and industrial sectors - all gaining 11 to 15%. More sectors posting gains tends to be a good sign that the stock market rally is sustainable.
International markets continue to lag the U.S. with developed markets gaining 6% as European growth has stalled. Emerging markets only added 2% during the quarter as China’s weight in the MSCI Emerging Markets Index dropped to a record low 25% after being as high as 43% at the peak in 2020. A confluence of events in China have led to material weakness including: real estate defaults, regulatory crackdowns, slower GDP growth, Common Prosperity initiatives, and high geopolitical uncertainty. While Chinese stocks are down about 40% from their 2021 highs, one constant attribute is that Chinese stocks are volatile. Rapid gains and losses are common historically and we maintain exposure, but remain underweight in non-U.S. markets.
The technology revolution in Artificial Intelligence (AI) continues to generate intense investor interest and has helped to lift technology stocks. It is being rapidly incorporated into products and services facing consumers such as Microsoft’s Copilot. Corporate use is also expanding, such as AI-based purchase recommendations at Amazon, robotics at Tesla, and fraud prevention at JPMorgan Chase. We expect the largest tech companies to continue to dominate and benefit from the AI race, but new companies are developing quickly to support the revolution, which we expect to both enhance and disrupt our lives.
Traditional bonds have been surprisingly weak this year with the aggregate bond index down nearly -1%. Driving performance has been an increase in treasury bond rates, with the 10-year yield rising from 3.9 to 4.2% during the quarter. Our expectation is that rates will not change materially from current levels, with the trend likely being lower over the next year. With starting treasury coupon rates in the 4 to 5% range, we expect bonds to perform well during the next year.
Markets remained focused on two tightly connected factors, Federal Reserve policy and inflation. During the March Federal Open Market Committee meeting, the Fed reiterated their expectation for three rate cuts of 0.25% each this year while adjusting upward their expectation for rates to remain higher at the end of 2025 (4%) and 2026 (3%). If, for some reason, the rate cuts do not materialize this year, we expect markets to respond negatively. The Fed’s inflation target is 2% and CPI fell quickly from the highs of 2022, but seems to have stalled in the 3% range for the past year. Getting to 2% may require rates to remain higher for longer. This is good for savers, but may continue to pressure more rate sensitive parts of the economy such as housing and consumer credit. At this point, the illusive economic “soft landing” appears to be in place and a recession in 2024 seems unlikely. Economic growth has been resilient in the face of higher interest rates, but traditional warning signs remain, including the longest yield curve inversion in history – at 630 days – and weak leading economic indicators.
In light of these mixed signals our mantra remains consistent – we know we can’t control the ups and downs of markets, but we can rely on our disciplined investment processes to provide well-designed, tax-efficient, globally-diversified portfolios that suit your investment planning needs.
Thank you for your continued confidence in our work.
Sources: YCharts, Redwood, AP News, Google Finance, Lazard, St. Louis Fed, Bondsavvy
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.
