BACK
First Quarter Review: The equity markets proved to be quite resilient in the first quarter as they continued their upward trend from 2023. Once again, large capitalization U.S. stocks led the way as the Standard and Poor’s 500 Index jumped 10.6%, more than doubling the 5.2% gain for the Russell 2000 Small Cap Index and the 4.7% return of the MSCI All World ex-U.S. Index. With market interest rates rising across the yield curve, the Bloomberg Aggregate Bond Index declined 0.8%. Gold rallied 7.6% and the Bloomberg Commodity Index rose 2.2%.
At the start of the year, we expressed our view that the market was too confident in moderating inflation and a corresponding dovish Federal Reserve. Investors were pricing in six reductions in the Fed Funds rate over the course of the year even as the Fed was signaling only three cuts. In the early stages of the second quarter, the timing and magnitude of any 2024 cuts is very much in question, particularly after the March CPI report (core year-over year increase of 3.8%) revealed the stickiness of price pressures. Undeterred, equity investors have pushed aside inflation and rate concerns and are focusing on the impressive strength of the domestic economy. Personal spending has remained solid, supported by a robust labor market that is keeping the unemployment rate below 4%. The domestic economic performance and inflation data has, however, had an impact on the U.S. bond market, with interest rates rising by 0.30% to 0.40% across the yield curve in the first quarter and moving sharply higher into early April. The Ten-Year yield crossed above 4.5% on April 10th and the last time the Ten-Year was at that level, in mid-November, the S&P 500 Index was 15% lower than current levels.
Portfolio Strategy: With the Federal Reserve handcuffed for the moment, the pressure is fully on first quarter earnings to reflect the economic vitality and validate market P/E multiples. It has been a stellar run for the past five quarters and in “core” portfolios, we are very focused on broad diversification. This includes a mix of styles, factors, and geographic concentrations in equity allocations, along with hard assets, bonds, and cash. We believe broad exposure will be very important moving forward as this current economic cycle evolves. Growth again outperformed value across the capitalization spectrum in the quarter and from relative valuations the long-term opportunity in the value category appears to be significant. The Magnificent Seven still had a large impact on market performance, specifically driven by Nvidia and Meta, but this should not be sustainable indefinitely. With the rise in yields thus far in 2024, bonds are again investable, but we remain guarded given the massive supply of Treasury debt that will be auctioned this year. We continue to maintain gold and commodity exposure where appropriate given geopolitical instability and resultant supply chain disruptions. In “non-core”, concentrated equity and the common stocks allocations in core portfolios, we are letting strong performers run while seeking to identify high-quality companies that are currently off the radar screen and trading at valuations below their historical norms. Even though overall market valuations are elevated, we do see opportunities in areas that have missed the AI hype train, and we will continue to search for companies that will ultimately benefit from AI even though those benefits may not be fully apparent today.
We thank you for your trust and we welcome the opportunity to discuss your portfolio in detail.