Q1 2024 Market Commentary

May 01, 2024

We have started the year with strong returns from stocks, while bonds are relatively flat. Interest rates ticked up as stingy inflation diminished hopes of 4 or more rate cuts this year in the US. Thus, US bonds, as measured by the Bloomberg Aggregate Bond Index, declined -0.8%. Foreign bonds appreciated 0.2% during the quarter. The returns in stocks carried the day in Q1. The ranking of asset class returns in stocks during the first quarter mirrored those of the past decade. US large-cap stocks led with a 10.3% return in the quarter. Mid-caps were next at 8.6% and small-caps at 5.2%. International stock returns were 5.9% in Q1 in US-dollar terms. But, if we look at the growth of international stocks in local currencies, they were just as strong as US large-caps at 10.1%. Emerging market stock returns were dragged down by China, which is about 25% of the index. The index was up 2.4% during the quarter, despite China declining by -1.7% (US-dollar) and -2.2% (Yuan). With higher interest rates relative to just 18 months ago, the debt laden commercial real estate market declined -1.2%.

The question of whether the US economy will experience a soft landing continues to be the narrative as we begin the year, with the Fed sitting in the pilot’s seat. Gross Domestic Product (GDP), the most common measurement of economic activity, was 3.4% in the 4th Quarter, 3.1% for the year, and estimated to be in the high 2% range in Q1 2024. Will higher interest rates for longer push GDP lower, even into negative territory, or will the Fed decide to lower rates, with the expectation that the economy will stay on its current steady course? These are the questions market analysts are pondering. As we’ve discussed over the last several quarters, the Fed is focused on lowering inflation. It has been successful in that goal. The 9%+ inflation rate in the summer of 2022 is not conducive to a healthy economy. There has been a steady decline since, but the March Consumer Price Index (CPI) reading of 3.5% is still above the long-run target of 2%.

If we dissect inflation, there are some interesting observations. The largest components of CPI are Energy, Core Goods, Shelter (homes and rents), Food at Home, Dining & Recreation, and Auto Insurance. Energy prices have been dropping since February 2023, though oil has drifted higher of late. The growth of Food at Home prices has been declining. Dining & Recreation has slowed, too. The two largest drivers of CPI lately have been Shelter and Auto Insurance. Shelter accounts for approximately a third of CPI, and it grew by 6.5% year-over-year in February. Auto Insurance is only 3% of CPI but it grew by about 20% over the same period. Those two components accounted for approximately 2.7% of the 3.2% CPI reading in February.