Monthly Market Commentary - April 2024

Monthly Update
U.S. small cap stocks led asset class returns in March.

Although small stocks outperformed during March, domestic and non-U.S. large cap stocks continued their recent move higher as each notched their fifth consecutive month of gains.

• U.S. stocks rally broadly led by energy: Small cap stocks (Russell 2000 Index) gained +3.6% and outperformed large cap stocks (S&P 500 Index) which returned +3.2%. Value stocks outperformed growth stocks during the month as energy was the top performing sector within the Russell 2000 (+9.8%) and the S&P 500 (+10.6%).
• Bonds post first positive monthly return of 2024: Bonds (Bloomberg US Aggregate Bond Index) returned +0.9% as Treasury yields declined modestly in March as the Federal Reserve (the Fed) provided investors with comfort that the central bank was still on track for three interest rate cuts in 2024.
• Non-U.S. stocks led by Europe: Non-U.S. developed market stocks (MSCI EAFE Index) returned +3.3%; and outperformed Emerging Markets stocks (MSCI EM Index) which returned +2.5%. European equities (+3.7%) were higher on the prospect of potential rate cuts by the European Central Bank (ECB).

U.S. Equities
Artificial Intelligence (AI) stocks, bank stocks, and dividend paying stocks all pushed equity markets higher in March.

The move higher in equities during March was fueled by a variety of themes that spanned across value and growth sectors which could be an early sign that market leadership in 2024 may broaden out beyond the “magnificent seven” stocks that were dominant in 2023.

• AI stocks outperformed the tech sector: Five leading AI-related stocks (NVIDIA, Microsoft, AMD, Taiwan Semi, and Broadcom), recently dubbed the “AI 5”¹, have driven returns in technology. After posting an average return of over 100% in 2023, positive momentum has carried over into the first quarter of 2024.
• Banks rose on the potential for rate cuts: Larger diversified banks and smaller regional banks both posted strong returns in March. The Fed reiterated rate cuts are likely in 2024 which should help normalize the yield curve (currently inverted) and potentially boost bank profits.
• Dividend paying stocks bounce back: Yield was the worst performing equity factor in 2023 and year-to-date through February. However, the potential for lower yields on money market funds and other fixed income investments as we move through 2024 could be increasing investor appetite for dividend paying equities.

Fixed Income
Higher bond yields could be offering an opportunity for investors looking to extend duration.

Money market assets were over $6 trillion at the end of March and remain near an all-time high². Many investors have been hesitant to extend duration with money market yields exceeding 5% but we could be near an inflection point in fixed income markets if the Fed begins to cut rates.

• Higher bond yields can lower interest rate sensitivity: Higher bond yields may improve investment returns, but they can also dampen volatility. All else equal, bonds with a higher yield demonstrate greater price stability when interest rates rise and could improve overall portfolio diversification.
• Credit spreads near 2021 lows³: Corporate bonds normally offer higher yields than similar maturity Treasury bonds because of their expected higher chance of default. When the premium between corporate bond yields and Treasury bond yields (the “spread”) falls, this signals that investors are confident in the repayment of corporate bonds.
• Bonds have outperformed cash when the Fed Funds rate declines: Bonds provided meaningful outperformance relative to cash during the three rate cut cycles over the last twenty-five years. Further research suggests allocating to bonds three to six months in advance of the first rate cut in these cycles had only a small impact on returns⁴.

Commodities
Gold prices reached an all-time high on the prospect of lower interest rates.

Commodity prices were challenged in 2023 as the fear of a U.S. recession and slowing growth in China served as headwinds to the asset class. However, gold was a top performer in 2023 and is off to a positive start in 2024. In addition, oil prices rose sharply in March which contributed to a strong month for energy stocks.

• Gold prices rose to a record high in March: Historically, gold tends to exhibit a negative correlation with interest rates and the Fed has indicated we are likely to see lower short-term interest rates later this year. Gold has also served as a haven during times of geopolitical risk, and rising tensions in the Middle East and the on-going conflict in the Ukraine may have spurred demand. Lastly, China’s central bank has been steadily accumulating gold to diversify its reserves away from the U.S. dollar⁶.
• Rising oil prices boosted energy stocks: OPEC supply cuts, rising tension in the Middle East, Ukrainian drone strikes on Russian oil producers, and an improving economic outlook in the U.S. and China all contributed to the climb in oil prices, which led to energy being the top performing sector within the S&P 500 in March.

Federal Reserve
The Fed held short-term rates steady but reiterated expectations for three 0.25% cuts in 2024.

There was some angst among investors heading into the Fed meeting on March 20 due to the two most recent inflation (CPI) reports coming in above estimates. However, Fed commentary following the meeting appears to have calmed fears the Fed could pivot to more restrictive policy.

• Inflation is trending lower but on a bumpy road: Fed Chair Powell acknowledged the hotter than expected inflation reports for January and February and suggested this was further evidence of inflation’s bumpy path down. He also noted low inflation readings in the second half of 2023 could make for some challenging comparisons later in 2024.
• Fed rate cut projections were unchanged: March data reflected a median forecast from Fed members that short-term rates would end the year -0.75% lower than the current range of 5.25% to 5.50%. Chairman Powell also added that a strong labor market wouldn’t deter the central bank from cutting rates.
• The Fed increased estimates for economic growth: In its updated summary of economic projections for 2024, the Fed increased its forecast for gross domestic product (GDP) to 2.1% (from 1.4%), lowered projections for the unemployment rate to 4.0% (from 4.1%) and held inflation (PCE) steady at 2.4%.

Economic Calendar
Investors will be looking for a dip in inflation (CPI) following three consecutive months above estimates.

• CPI exceeded expectations in February: This marked the third consecutive month annualized CPI was above consensus estimates. Many economists expected the “last mile” of inflation (moving from 3% down to the Fed’s target of 2%) to be challenging and recent comments from the Fed seem to have soothed investors for the time being. However, the potential risk to capital markets is that inflation flattens out for longer than anticipated (or rises), and results in the Fed taking a slower path with rate cuts.
• The labor market continued to be a source of strength for the U.S. economy: New jobs created in February totaled +275k and topped estimates of +198k. Average hourly earnings, a closely watched indicator for the direction of inflation, rose 4.3% from a year ago, down from 4.5% in January and below the 4.4% estimate.
• GDP expected to grow but at a slower pace: GDP was strong in the second half of 2023 and registered 4.9% in Q3 and 3.2% in Q4. Q3 was the highest level of growth in two years and although consumer spending was solid, the overall growth rate was likely an outlier due to elevated government spending. Estimates for Q1 2024 are currently 2.1%.

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