Insights

First Quarter, 2024 Market Review

April 19, 2024

Dear Clients,

As spring arrives and nature begins to awaken, many of us turn to the annual tradition of spring cleaning. It’s a time to refresh our living spaces, declutter our surroundings, and prepare our outdoor areas for sunnier days ahead. It’s also an ideal moment to review our financial plans and ensure they’re aligned with our goals for the year. Just as we methodically go from room to room during spring cleaning, it’s prudent to review our economic landscape and financial markets. Below, we’ll delve into how both have evolved since the start of the year.

Economic Review

Q1 economic data paints a picture of a robust U.S. economy. Personal spending surged by 0.8% in February, bolstered by wage increases. Despite core CPI surpassing expectations, the Fed’s preferred measure, core PCE, saw a more modest rise. The latest projections forecast a respectable 2.3% growth in Q1 GDP, indicating a healthy trajectory.

The U.S. Markets

Despite initial January jitters, the S&P 500 Index gained 10.2%, marking its best first quarter since 2019. The index hit a record high on January 24, officially erasing all losses from the 2022 bear market. A slew of new highs followed as the index continued to climb.

• In Q1, growth stocks, notably the leading mega-cap tech stocks known as the “Magnificent Seven,” maintained strong performance. However, performance varied within this group, with Nvidia and Meta standing out while Tesla and Apple faced challenges. Nvidia’s remarkable 82% surge contributed 21% to the overall market gain, alongside strong showings from Microsoft, Meta, and Amazon. While small-cap stocks underperformed large-cap stocks overall in Q1, they displayed greater resilience, particularly in March.^†

• The contribution of the “Magnificent Seven” to the S&P 500 has diminished to 41% year-to-date and further to 34% in March, signaling a notable shift in market dynamics. This suggests that the rally is expanding beyond its previous confines, with other companies taking on a more significant role in driving market performance.

International Equities and Emerging Markets

International equities and emerging markets had a solid start to 2024, although they fell behind their U.S. counterparts. Developed markets outside the U.S. achieved a respectable 4.5% gain while Chinese equities faced challenges, affecting the overall performance of emerging markets, which saw a modest return of 1.9%.

The Bond Markets

Bond yields edged higher, causing prices to decline, with the 10-year U.S. Treasury note reaching a year-todate peak of 4.33% by the end of March. The most significant losses were observed in long-term bonds, which are typically more reactive to interest rate shifts.

• The Long-Term Treasury Bond Index declined 3% in the first quarter, partially offsetting the index’s 12% gain from the previous quarter.
• The Core Bond Index concluded the first quarter with a 0.8% decrease, while U.S. Treasury bonds overall saw a 0.9% drop.

Commodities⁵

Oil prices climbed sharply amidst geopolitical tensions and production constraints, contributing to rising inflation. Gold and copper prices saw more modest gains.

Cryptocurrency⁵

The approval of exchange-traded funds investing in Bitcoin sparked a significant rally. As a result, cryptocurrency hit new all-time highs, notching gains of more than 60%.

Navigating All-Time Highs

In the first quarter, the S&P 500 Index hit 22 new all-time highs after surpassing its previous peak from January 2022. This remarkable performance has led some investors to consider reducing their stock holdings, although market highs are quite common. Since 1957, the S&P 500 has hit over 1000 new highs, averaging one roughly every two weeks. Investors might be surprised to learn that the average market performance following all-time highs doesn’t show any statistically significant difference compared to other periods.

Nonetheless, it can still be wise to sell stocks as part of a broader portfolio rebalancing strategy. Rebalancing is essential when your portfolio strays from its long-term targets outlined in your investment plan. This decision should be guided by the relative performance of the asset classes in your portfolio rather than market highs solely. For example, if stocks have significantly outperformed bonds, rebalancing might entail selling some stocks and reinvesting in bonds to realign with your intended asset allocation. Conversely, if both stocks and bonds are performing well and your portfolio remains aligned with your investment plan, rebalancing might not be necessary.

Benefits of International Diversification

With the U.S. dominating the market for quite some time, some investors are questioning the relevance of investing in foreign stocks. Looking back at 2022, both U.S. and international stocks experienced negative returns, but international stocks showed more resilience than their U.S. counterparts. In 2023, both regions saw positive developments, but U.S. stocks continued to outperform, extending a trend that began in the early 2010s.

However, it’s crucial to take a broader perspective on diversifying your investments.

Diversification means acknowledging that some parts of your portfolio may not always perform as well as others. While sticking with international stocks might seem challenging when U.S. stocks are thriving, history reminds us that market dynamics can change in the blink of an eye.

Reflecting on the early 2010s, international stocks were outperforming U.S. stocks, following a decade where the U.S. lagged from 2000 to 2009. Interestingly, during that period, investors were debating the opposite strategy – whether to reduce exposure to U.S. stocks and increase investments in international markets. This underscores the importance of adhering to long-term investment plans and maintaining a diversified portfolio.

So, even though the current trend favors U.S. stocks, our advice remains unchanged: maintain a meaningful allocation to international stocks. Despite recent setbacks, history suggests that market trends can reverse unexpectedly. Just as in the past, international stocks may once again have their time to shine.

As we evaluate the economic landscape and financial markets, it becomes clear that periodic reassessment is essential for staying aligned with our financial objectives. Just as maintaining order and efficiency in our homes contributes to our well-being, rebalancing our investment portfolios serves a similar purpose. By embracing diversification and maintaining a long-term perspective, we can confidently navigate through market fluctuations. So, as we embrace the spirit of renewal that spring brings, let’s not overlook the opportunity to apply the same principles of diligence and organization to our financial health.

Thank you for your continued trust and partnership.

THE LOURDMURRAY TEAM

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†Source: Morningstar, April 1, 2024: https://research.morningstar.com/articles/7BS7Y5QWIJADDAA5X4GZ3KZYWU/13-charts-on-the-q1-stock-rally-that-just-wouldnt-quit