1st QUARTER 2024 MARKET REVIEW
04/11/2024
Investors may want to consider rotating from cash to Treasuries and/or corporate bonds.
Thrivent Asset Management contributors to this report: John Groton, Jr., CFA, director of administration and materials & energy research; Matthew Finn, CFA, head of equity mutual funds; Kent White, CFA, head of fixed income mutual funds; and Jared Hagen, senior investment product specialist
Market expectations for interest rate cuts have shifted to possibly three later this year.
U.S. stocks set several new highs in Q1.
The Treasury yield curve set a new record for the longest period that the curve remained inverted.
The S&P 500® Index set 22 new highs in the first quarter of 2024, a clear indication of the increasing confidence the market had for the strength of the U.S. economy and its prospects for achieving a soft landing later this year.
While the strength in equities was more broad-based than in recent quarters, technology and technology-related stocks again dominated headlines. Nvidia Corp., the manufacturer of computer chips that can be used to power artificial intelligence (AI), rose an astounding 82.5% over the quarter. While not all the “Magnificent Seven” companies had such a strong quarter (the share price of both Tesla Inc. and Apple Inc. declined over the period), the market remained buoyed by optimism for AI. However, strength in the financials sector (up 12.46%, the fourth best-performing sector in the S&P 500 Index), is an indication of the market’s growing confidence in the banking system and the consumer—despite indications that delinquencies have been rising in the lower-income segments of the population.
Comments from the U.S. Federal Reserve (Fed) were relatively hawkish over the period, progressively pushing back expectations for interest rate cuts as the quarter progressed. While this was in part an affirmation of the strength of the economy—why add fuel to the economy with lower rates if you don’t need to?—it was also a reflection of less encouraging inflation data. March’s Personal Consumption Expenditures Index (PCE), which is the preferred measure of inflation for the Fed, showed a small year-on-year rise in the headline figure, and a slight decline in the core (not including food and energy) figure. January and February’s Consumer Price Index (CPI) reports saw figures generally above consensus expectations. As markets were hoping to see a steadier decline in inflation, sentiment shifted toward our long-held view that the Fed would take a cautious approach to interest rate cuts for fear of inflaming inflation.
While worries about inflation are there—rising oil prices of 16.08% over the quarter and gold surged to all-time highs—delays in interest rate cuts and rising supply pushed Treasury yields higher. Benchmark 10-year Treasuries ended the period at 4.20%, up 0.32% but well below the highs of last year. The Bloomberg U.S. Aggregate Bond Index, the benchmark for a mix of Treasuries, investment-grade corporate bonds and mortgage-backed securities, fell 1.41% over the quarter.
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The S&P 500 Index surged 10.16% as the U.S. economy continued to exceed expectations, solidifying the view that it would see a soft landing in 2024. More hawkish comments from the Fed reinforced this view, while also pushing back expectations for interest rate cuts. Over the period, the index rose from 4,769.83 at the end of December, to 5,254.35 at the end of March. The total return of the S&P 500 Index (including dividends) was 10.56%.
The NASDAQ Composite Index® rose 9.11% over the quarter, from 15,011.35 at the end of December, to 16,379.46 at the end of March.
Retail sales in February rose 0.6% from the previous month and 1.5% from February of last year. However, January’s reported 0.8% increase was revised to a 1.1% decline, according to the Department of Commerce report issued March 14. The February rise was supported by a 1.6% increase in car and car parts, strong electronics and appliance sales (up 1.5%), rebounding building material and garden equipment sales (up 2.2%) and a rise in gasoline sales, reflecting higher gas prices. Online sales slipped, falling 0.1% in February.
Monthly job creation rose each month in the first quarter, culminating in a 303,000 gain in March, well above the consensus expectations closer to 200,000. Job growth in January and February was also revised up by 22,000, according to the April 5 report from the Department of Labor. The unemployment rate fell 0.1%, from 3.9% in February to 3.8% in March, though this was broadly in line with expectations. At the sector level, job growth was led by health care, followed by government hiring and leisure and hospitality.
Average hourly earnings rose 0.3% in March, up from 0.2% in February. However, the year-on-year growth slowed to 4.1% from 4.3% in February.
Of the S&P 500 Index’s 11 sectors, all but real estate (which fell just 0.55%) rose over the quarter. Communication services led, rising 15.82%, followed by energy (up 13.69%), information technology (up 12.69%) and financials (up 12.46%). Unlike previous quarters, the strength was broad-based, with all sectors (except real estate) rising more than 4%, and all but three sectors rising more than 7%.
The chart below shows the results of the 11 sectors for the past month and first quarter.
The yield on 10-year U.S. Treasuries rose over the quarter, from 3.88% at the end of the year to 4.20% at the end of March. In mid-March, the Treasury yield curve set a new record for the longest period that the curve remained inverted—that is, with short-dated Treasuries paying higher yields than longer-dated securities. The previous record was set in 1978. While yields are still well below the highs seen last fall, stronger than expected inflation data, still robust economic growth, delayed rate cuts and concern about supply pressure in the quarters ahead pushed yields higher over the period.
As interest rates rose, the Bloomberg U.S. Aggregate Bond Index fell 1.41% over the quarter.
Corporate 12-month earnings projections for the S&P 500 Index continued to rise. Earnings per share (EPS) estimates rose just under 3% (2.90%) over the quarter, a sign of increasing optimism about the outlook for economic growth.
The forward 12-month price-earnings ratio (P/E) of the S&P 500 Index rose over the first quarter, from 19.52 at the end of last year to 20.96 at the end of March. A higher P/E ratio means stocks are more expensive relative to their EPS.
The forward 12-month earnings yield, which is the inverse of P/E, fell 6.59% over the period. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The March-end equity earnings yield, at 4.78%, is still above the 4.20% yield offered by 10-year U.S. Treasuries at the end of March, but the gap continues to narrow.
The U.S. dollar appreciated versus the euro and Japanese yen during the quarter, with the euro falling 2.23% relative to the dollar, and the dollar rising 7.35% relative to the yen. Expectations that interest-rate cuts would be pushed back while the economy remained relatively robust helped support the dollar.
Oil prices turned higher over the quarter, with the price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, rising 16.08%, from $71.65 at the end of last year to $83.17 at the end of March. While geopolitical tensions have increased in the Middle East and the Red Sea, the strength was primarily the result of renewed optimism for global growth prospects and the extension of production cuts—which were scheduled to expire at the end of March—announced by OPEC+ (a consortium of oil producing nations), including Saudi Arabia and Russia.
Gasoline prices at the pump rose 10.22% over the quarter, from $3.24 at the end of last year to $3.57 at the end of March.
Gold prices surged in the first quarter, up 8.4%, from $2,071.80 at the end of last year to $2,249.20 at the end of March. The rise was primarily due to gold investors becoming more comfortable that the Fed will be lowering interest rates, diminishing the opportunity cost of holding gold. Additionally, foreign demand, and the desire to hold assets that could be a hedge against political risk, contributed to price increase of gold.
Every major global equity region (except China) rose in the first quarter, supported by signs the global economy was turning up, rallying U.S. stocks and expectations for a soft landing in the U.S. While U.S. momentum waned in the final weeks of the quarter, benchmark indices in the U.K., France, Spain and Germany remained strong, with each outperforming the S&P 500 Index in March. Globally, growth stocks outperformed value stocks over the quarter. The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Australasia and the Far East, rose 5.06% over the quarter.
Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com
All information and representations herein are as of 04/11/2024, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.
The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks. The Nasdaq – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings. The Bloomberg U.S. Aggregate Bond Index is an unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market. Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
