Coming off a robust quarter to conclude 2023, US equities rode the momentum to a series of new all-time highs in Q1, delivering the strongest start to a year since 2019. The S&P500 rose by 10.6% on a total return basis and notched twenty-two record highs during the quarter. While the rally was uniform across the board, small-caps lagged large-caps by a wide margin (Russell 2000 +5.2% vs S&P500 +10.6%) as the market digested a less dovish rate cut environment moving forward. Growth outperformed value, and ten of the eleven GICS sectors were positive during the quarter, with real estate the only sector showing red as of March 31st. To put it mildly, the sailing continues to be smooth.
In contrast to last quarter’s rally – which was a result in large part due to the dramatic fall in bond yields – the extension of gains this quarter came despite a more hawkish repricing of future monetary policy. The Federal Open Market Committee held its benchmark rate constant for the fifth consecutive month (5.25-5.5%) as it seeks more economic data to show “greater confidence” that inflation is on the path toward the magical 2% number. As of this writing, the Fed dots show a projected three cuts in 2024, potentially beginning as early as June or July. This is in stark contrast to the approximately seven cuts seen by the market to begin the new year. With gas prices moving steadily higher to $3.53 per gallon on average, March inflation will be a major influence on the Fed’s decision to begin easing policy.
In terms of economic data, we saw Q4 GDP revised up to 3.4% from its initial 2% consensus, based on a strong consumer who just refuses to stop spending. And why would they? The labor market remains incredibly resilient, with 229K jobs created in January and 275K in February. At the same time, inflation as measured by the Fed’s favorite indicator continues to sink, affirming the goldilocks scenario comprised of cooling inflation, decreasing interest rates, and broadly supportive economic conditions. Not too hot, not too cold, but just right.
Equities are not the only asset class tagging all-time highs as we move into April. Both Bitcoin and gold prices touched unfamiliar territory during the quarter, with the latter now costing more than $2,250 per ounce, up nearly 40% from its recent bottom in 2022. Given gold’s status as a safe haven asset that typically rallies during risk-off markets, this recent uptrend is slightly unusual, but the precious metal continues to increase in value as both the US Dollar and interest rates are projected to fall during the back half of this year. The fact that gold easily blasted through the psychologically crucial $2,000 mark – and has not fizzled – shows that prices appear to be consolidating before the next move.
Finally, during the quarter former and current Presidents Trump and Biden secured enough delegates to clinch the nomination for their respective parties in the upcoming election later this year. While the election has heretofore been relegated to the back burner of investor interest, it should become a key component in future quarters as each candidate’s platform is firmed up, defined, and communicated to the public.
Q1 earnings season is rapidly approaching, and market’s current streak of gains will be highly dependent on those results. The ongoing rally is historic by the true definition of the word, as it is only the ninth time since 1940 that consecutive quarters have delivered back-to-back double-digit gains. Historically, this is a bullish signal and, against the goldilocks backdrop described above, the path to higher returns from here seems clear. However, it is likely that the remainder of the year will be increasingly challenging as the election unfolds and inflation levels bob and weave. Discipline and a sound long-term plan remain critical.
As ever, we thank you for your continued trust and support. Happy spring to all.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.