Global asset class performance in the first quarter of 2024 diverged after a strong rally in the final months of 2023, as markets adjusted expectations for policy rate cuts in major developed economies. While the US saw robust 3.4% GDP growth in Q4 2023, the UK and Europe entered a technical recession. China's ongoing property sector challenges weighed on its economic outlook. Disinflation persisted in the US, UK, and Europe, with fluctuations in US inflation giving investors pause. Central banks in major economies held policy rates steady, prompting a recalibration of rate cut expectations. Equities performed well, particularly cyclicals, buoyed by strong Q4 earnings in the US and optimism in AI-related technologies.
Q1 2024 Market Commentary
Domestic Equities
US equity investors entered the first quarter on the heels of one of the strongest short-term rallies in history. This surge was fueled by optimism surrounding the prospect of a soft landing for the economy – a scenario where economic recession could be averted, inflation would inch closer to the 2% target, and the Federal Reserve would commence cutting rates in the Spring. Initially, traders anticipated the Fed to slash interest rates six times throughout the year, double the Fed's own projections. However, as economic data throughout the quarter exceeded expectations and inflation figures revealed more persistence than initially anticipated, these expectations swiftly began to recede. Currently, markets are factoring in only two cuts, expected to commence by September.
Despite the significant shift in the trajectory of interest rates leading to higher market rates and exerting some downward pressure, domestic equities posted substantial gains during the first quarter. This broad advance was underpinned by corporate earnings figures that appeased investors and alleviated concerns of an impending earnings recession, coupled with consistently positive economic data that buoyed sentiment. Virtually every sector of the S&P 500 participated in the rally, except for the interest rate-sensitive Real Estate sector, as expectations of higher rates gained traction. Technology and Communications, perennial leaders, performed strongly once again, buoyed by a handful of their largest constituents. They were joined by Financials and Energy, which staged an impressive rebound from the previous quarter, fueled by higher global energy prices. The S&P 500 surged by 10.5%, the Nasdaq gained 9.3%, and the Dow Jones Industrial Average added 6.1% during the quarter.
Notably, economic data played a significant role in driving much of the performance seen in the quarter. Retail sales surged in March, exceeding expectations, and ending the quarter on a very high note. The manufacturing sector also exhibited signs of recovery, with the ISM Manufacturing PMI entering expansionary territory for the first time in nearly a year and a half. Despite a marginal uptick, the unemployment rate remained at a resilient 3.8%, underscoring the strength of the US labor market. Inflation displayed stickiness during the first quarter with the substantial progress made so far stagnating. Headline CPI inched up from 3.4% to 3.5%, while core CPI, excluding volatile energy and food prices, saw a slight decline to 3.8%. The PCE index, the Federal Reserve's preferred inflation measure, displayed more progress, with the core rate easing to 2.8%.
Foreign Equities
The MSCI ACWI ex-USA index gained 4.7% for the first quarter of 2024.
Eurozone
The Eurozone is expected to remain in or near recession in the first half of 2024 due primarily to high interest rates and tight fiscal policies, with GDP growth forecasted at a dismal 0.1%. Low unemployment, strong wage growth, a tight labor market, and cooling inflation will prompt ECB rate cuts starting this year.
European equities lagged the US and Japan in the first quarter, despite certain indexes such as the French CAC 40 achieving all-time highs. The MSCI Europe ex-UK Index recorded a gain of 9.7% for the quarter, as market sentiment is starting to shift for the region due to improving economic data.
UK
UK stocks continued to underperform international-developed markets in the first quarter, with the FTSE All-Share Index rising just 3.6% from the start of the year. The UK's market struggles were amplified by its value bias and the economy's fall into a technical recession in the last six months of 2023. Persistent service inflation and wage growth compelled the Bank of England to maintain a restrictive monetary policy stance until further progress is made.
Japan
Japan was the top-performing market in the first quarter, with the TOPIX index surging 18.1%. This notable rise occurred despite the Bank of Japan began normalizing its monetary policy in March, which included ending its negative interest rate policy, ceasing yield curve control, and halting its asset purchases.
Emerging Markets
Emerging market equities, represented by the MSCI EM Index, underperformed with a return of only 2.4% amid ongoing concerns about China’s economic prospects without significant fiscal stimulus. Nevertheless, the MSCI China Index recovered 12.3% from its January low, spurred by positive economic data during the Lunar New Year and easing measures from the People’s Bank of China, which reduced its 5-year loan prime rate for the first time since June 2023. Equity investments in Peru, Turkey, and Taiwan were bright spots for emerging markets in the first quarter.
Fixed Income
Fixed income markets experienced broad losses in the first quarter, with only certain sectors finding limited support. At the onset of the year, bond investors were buoyed by optimism stemming from the Federal Reserve's adoption of a more dovish stance, hinting at the likelihood of interest rate cuts throughout the year. However, as the months unfolded, these initially optimistic expectations, reflected in market pricing, were tempered, resulting in an uptick in market interest rates and a decline in global bond prices. The Bloomberg Global Aggregate Index lost 2.1%.
US Treasuries
While the Federal Reserve maintained its policy rate, the expected trajectory for the remainder of the year witnessed significant volatility, ultimately concluding with fewer anticipated cuts factored into forecasts. Despite earlier signs of economic cooling, business activity showed resilience, bolstered once again by robust consumer spending. Inflation readings consistently exceeded expectations, indicating a reluctance to retreat from current, above-target levels. Consequently, both Federal Reserve officials and market participants revised their projections for the number and pace of anticipated cuts from the central bank. Shifting expectations prompted a rise in Treasury yields across the yield curve, particularly impacting longer-dated bonds. As a result, the Bloomberg Intermediate Treasury Index experienced a decline of 0.4%.
Corporate Credit
Despite credit investments generally outperforming their treasury counterparts due to their lower sensitivity to interest rate fluctuations, they were not immune to the yield volatility observed during the quarter. Despite the supportive backdrop of stronger economic activity and looser financial conditions, the significant fluctuations in yields resulted in lackluster performance. High-yield bonds fared comparatively better than their investment-grade counterparts, benefiting from their higher income levels, which mitigated the impact of rising interest rates. Consequently, the Bloomberg US Corporate Bond Index declined by 0.4%, while the Bloomberg Corporate High Yield Index saw a rise of 1.5%.
Global Bonds
The global fixed income market mirrored the US experience, with renewed inflationary worries driving a widespread increase in yields and a corresponding decline in bond prices. Both the European Central Bank and the Bank of England joined the Federal Reserve by maintaining their current policy rates, reaffirming their dedication to maintaining a restrictive stance until they are confident that inflation will reach their respective targets. In contrast, the Bank of Japan raised its policy rate for the first time in almost two decades, signaling a potential shift away from negative central bank rates. Despite the challenges, global high-yield bonds eked out modest gains during the quarter, while investment-grade bonds followed suit with their government counterparts, experiencing declines.
Alternatives
Oil
During Q1 2024, the global oil market witnessed substantial production increases from non-OPEC+ nations, notably the US and Brazil, alongside strategic production cuts by OPEC+ members. This led to an anticipated near-balance in the market, despite potential surplus concerns later in the year. Price fluctuations were driven by geopolitical tensions and supply chain disruptions, with notable incidents impacting Red Sea shipping routes and North American production. The market dynamics reflected a nuanced interplay between rising supply, strategic production adjustments, and external geopolitical risks, resulting in a 17.7% increase in WTI Crude prices.
Private Credit
With interest rates maintaining their current levels, private credit is gaining increased attention in allocators' portfolios. Specifically, we’ve focused on direct lending at reasonable loan-to-value ratios, targeting hard assets in sectors that have struggled such as real estate through trusted investment sponsors. Looking forward, the growing investor allocations to private credit may potentially dilute returns as more capital flows into space, although this could be counterbalanced by potential rate cuts expected in the second half of 2024.
Private Equity
The private equity market faced an environment characterized by ongoing adaptation to recent economic challenges. Despite these obstacles, the sector has demonstrated resilience, with fundraising stabilizing, albeit with a concentration among larger funds. Furthermore, there is a strategic shift occurring within the industry, emphasizing greater operational involvement to drive value creation. This shift necessitates a more hands-on approach from private equity firms, increasing their operational capacity and capabilities.
Digital Assets
Cryptocurrency markets continued their rally in Q1 with Bitcoin gaining 65% and Ethereum rising 54%. This sustained performance has been fueled by the SEC approval of the Bitcoin ETF and the ongoing institutional adoption of Ethereum, such as BlackRock’s launching of a $250M fund on it. Coinbase emerged as one of the best performing public market stocks and recently launched its native L2 called Base. The Bitcoin halving is expected to occur in April 2024 and the SEC’s decision on the Ethereum ETF is expected in May 2024.