By DAN ZOLET CFA®
Associate Portfolio Manager
SUMMARY
- Equity markets continued their positive trend in Q1.
- Both ‘growth’ and ‘value’ sectors had positive returns.
- International: Japan leads, China lags.
Quarterly Recap: Equity Markets Continue Last Year’s Rally
The first quarter of 2024 continued the positive trends we saw in the last quarter of 2023. Global equities returned 8.2% for the quarter, and the S&P 500 hit an all-time high in March. Driving this rally to new highs was a combination of both valuation multiple expansion and earnings growth. On the multiple side, expansion could be attributed to anticipation of a Fed ‘pivot’ to easier policy, and excitement around AI-related technology. Paired with this was a reporting season that saw positive earnings growth from 8 of the 11 S&P 500 sectors, with 5 of them growing over 8%.
From a macroeconomic perspective, the first quarter provided more of a mixed bag. Inflation remains stubbornly above the Fed’s target, and consumer sentiment indicators are a bit gloomy. On the other hand, US economic growth has stayed solid and the job market remains strong. Over the course of the quarter, the 10-year retraced some of its rally from December but remains lower than the 5%+ level seen in November. Internationally, economic data remains sluggish, though the Japanese central bank raised its target interest rate… bringing an end to negative interest rates globally.
Returns Recap: US Still Leads Global Markets
Source: Factset, Morningstar. Data as of March 31, 2024. Chart shown for illustrative purposes only.
US Sectors: ‘Growth’ Remains Strong, but ‘Value’ Rallies Too
The top performing sectors for the first quarter had a variety of drivers (see chart, below). For Communication Services and Technology, the expectations for a Fed pivot and excitement over artificial intelligence (AI) provided a tailwind. These ‘growth’ sectors are particularly sensitive to rates because the present value of future earnings makes up such a large portion of their value. Thus, expectations for Fed cuts (and a 10-year below 5%) provide room for multiple expansion.
Source: Bloomberg. Data as of March 31, 2024. Chart shown for illustrative purposes only. Past performance is no guarantee of future results. Not indicative of RiverFront portfolio performance. See disclosures at the end of this publication for description of asset classes and the indices for which the returns above are based. Returns above do not reflect any fees or costs associated with investing in the applicable asset classes. It is not possible to invest directly in an index.
International Stocks: Japan Leads the Way, China Continues to Lag
In the first quarter, Japanese equities led the way in the international space, even outpacing the S&P 500. The rally in Japan is made even more impressive when considering the weakness in the Japanese Yen. It seems that after decades of hope, some corporate reform is starting to take hold in Japan. Also, the weakness in the Yen provides a tailwind for the export-focused Japanese economy.
On the other end of the return table, Chinese equites continue to lag the rest of the world. This is especially concerning when considering the sector makeup of the Chinese stock market; China is one of the few markets that has a comparable weighting to technology stocks as the US. Despite this feature, the combination of geopolitical headwinds and the economic slump China finds itself in has produced negative returns for the past four quarters.
Source: Bloomberg. Data as of March 31, 2024. Chart shown for illustrative purposes only. Past performance is no guarantee of future results. Not indicative of RiverFront portfolio performance. See disclosures at the end of this publication for description of asset classes and the indices for which the returns above are based. Returns above do not reflect any fees or costs associated with investing in the applicable asset classes. It is not possible to invest directly in an index.
Looking Forward: We Remain Cautiously Optimistic for ‘24
In Q1, equity markets were able to continue the positive trends begun in the last quarter of 2023. When looking at our tactical rules we remain cautiously optimistic on stocks, as laid out in last week’s Weekly View.
Given the optimism baked into the market currently, we believe volatility could be elevated in the short to medium term. Thus, we are currently aligning our portfolios with our ‘P.A.T.T.Y’ theme (‘Pay Attention to the Yield’ – a focus on investments with strong yields and cash flows to support them). Specifically, growth stocks with stable and growing free cash flow, cyclical stocks with well-funded dividends, and alternative yield strategies designed to benefit from market volatility are all attractive opportunities in our view.
From a portfolio construction perspective, we continue to slightly favor stocks over bonds in our balanced portfolios. We currently favor US stocks across our balanced portfolios and are tactically cautious on international.
For more news, information, and analysis, visit the ETF Strategist Channel.
Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.