2024 1st Quarter Market Commentary
Top Headline for Q1: Where’s The Volatility?
The U.S. stock market began the year how it ended 2023, with a steady climb upward absent any material pullbacks. In fact, according to Bespoke Investment Group, as of the end of Q1 the S&P 500 Index had closed in overbought territory (>1 standard deviation above its 50-day moving average) for 50 consecutive trading days. The last time the index had a longer streak of overbought closes was more than 25 years ago in April 1998 (60 days). In January and March, Federal Reserve Bank (“Fed”) minutes, along with public comments from Jerome Powell and others, confirmed that additional rate hikes were unlikely and that rate reductions were the probable next move. Risk markets welcomed the news with more aggressive buying throughout Q1 leading to a new all-time high for both the cap-weighted S&P 500 Index and equal weight S&P 500.
General Market Update
US Equities: During Q1, the equal weight S&P 500 Index rose 7.8%, the Nasdaq Composite was up 9.1% and the small company Russell 2000 Index rose 4.8%. It was a strong quarter for most sectors as the general broadening out of market breadth that began to emerge during the end of 2023 continued in Q1. In fact, six out of the 11 sectors within the S&P 500 Index outperformed the Technology sector (Energy, Communication Services, Financials, Industrials, Materials and Health Care).
Despite recent broader participation, market concentration continues to present a risk for the U.S. equity market as the “Mag 7” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla) climbed to around 30% of the overall U.S. equity market on a cap-weighted measure. We continue to favor an “equal weight” methodology in the current environment while also having exposure in our “sector overlay” to sectors we believe have more room to “catch up” to growth and technology. It’s noteworthy that a few of the Mag 7 stocks began to show downside risk during that quarter as two of the behemoths fell in value despite a surging overall market. Specifically, Tesla dropped a whopping 29.3% during the quarter and Apple fell 10.8%.
International and Emerging Market Equities: International equity markets also performed reasonably well during the quarter but continue to lag U.S. markets. The Schwab International Equity ETF (SCHF), which holds stocks of developed markets excluding the United States, was up 5.6% and the Schwab Emerging Markets ETF (SCHE) was up 1.9%.
Fixed Income and Credit: As we’ve mentioned in recent updates, the bond market is likely to exhibit above average volatility as the long-term inflation and interest rate picture continues to take shape. The 4th quarter marked a rapid surge in bond prices, with yields falling, as inflation concerns temporarily dissipated. However, as we moved through Q1, market participants began to get concerned about inflation given the strength of U.S. economic data and “dovish” Fed comments. To put this in perspective, the 10-Year Treasury yield was over 5% in Q3 2023 before falling below 4% by the end of 2023 and now it appears to be pushing rapidly back toward 4.5%. These are substantial moves by historical standards.
Pro-Inflation Investments: Inflation hedges surged in Q1. As we’ve mentioned for some time, there is a building concern over the lack of fiscal austerity by governments throughout the world that is causing a renewed interest in all forms of inflation hedging investments. Inflation hedges seem to be gaining momentum with some real “breakout” type performance in Q1. For example, Bitcoin surged to all-time highs and, on the precious metal front, gold, as measured by GLD, was up 7.6% for the quarter and 20% over the last 6 months. Also, certain commodities are climbing as well. For example, DBA, which represents a basket of agricultural commodities, was up 19.4% in the quarter.
A Look Ahead
As we mentioned during our last update, there is a large amount of capital invested in money markets and short-term bonds. Many investors have enjoyed the high risk-adjusted returns of short-duration income investments in this environment. However, as we look forward, it seems clear that the next move in short-term interest rates by the Fed will be down. As such, the interest rate environment is expected to look materially different in twelve months than it does today. These shifts are likely to have significant impacts on all markets. Our expectation is that 2024 will be a year of above average volatility in markets as the yield curve moves from being “inverted” (i.e., where short rates pay more than long-term rates) to a more normal upward-sloping curve. If inflation continues to drop, and the Fed responds by gradually lowering interest rates, both bond and equity markets should react favorably. Both markets will continue to try and predict when this will happen, causing increased volatility. We think using this volatility as an opportunity to rebalance should bring value to Patina Wealth clients.