Key Points:
- US stock indices hit all-time highs in March with the S&P500 gaining double digits for the first quarter of 2024.
- Stocks saw a reversal in sector leadership with energy, utilities and materials leading the gains.
- The Fed expects to cut the federal funds rate 3 times this year, but elevated inflation may keep rates higher for longer.
Stocks advanced again in March as investors were optimistic about corporate earnings, economic growth and interest rate cuts from the Federal Reserve. The S&P500, Dow Jones Industrial Average and NASDAQ indices hit all-time highs while marking their fifth consecutive month of positive gains. Energy stocks (+10.6%) were the best performing sector while oil prices climbed. Utilities (+6.6%) and materials (+6.5%) rebounded higher as the market began to find a renewed interest in value stocks. All domestic sectors of the market moved higher in March. For the first quarter of 2024 the S&P500 gained 10.6%, its 6th best quarter in the past decade.
Worries about a US recession have faded as the economy and stocks continue to grind higher. Inflation has remained stubbornly high on the strength of the US economy, reducing the expected number of cuts from the Federal Reserve to 3 (from 6) this year. The increase in oil prices is worth watching as it could increase inflation in the short term, but the slower economic activity as a result could prove deflationary in the coming quarters. The difficult task of getting inflation down to the Fed’s 2% target amid a strong economy could mean that fewer interest rate cuts this year are achieved. This could lead to increased volatility in equity and fixed income markets for the remainder of this year. The labor market continues to remain healthy with better-than-expected gains in productivity and unemployment just below 4%.
International stocks kept pace with US markets. The MSCI EAFE Index rose 3.3% in March while Emerging markets gained 2.5% with attractive returns in Mexico and Tawain. The US Dollar has remained strong as 10-year US Treasury yields are among the highest in the developed world. International stocks have underperformed US stocks over the past decade, but their relative valuations look attractive.
The Bloomberg US Aggregate Bond Index rose 0.92% for the month with mortgages and long corporate bonds leading the way. Treasury yields were largely unchanged in March as investors weighed the size and direction of potential rate movements. High yield bonds rallied 1.17%, but credit spreads continue to tighten (lower yield for taking on credit risk). Investors may enjoy higher cash yields for a bit longer if the Fed doesn’t see more progress on inflation in the coming months. However, reinvestment risk should remain a concern for cash investors if and when the Fed begins to cut rates.
Sources: Morningstar Direct, First Trust, Raymond James, JPMorgan.