Q1 2024 Market Review & Outlook

The year started on a strong note for stocks with the S&P 500 posting its best first quarter since 2019. The index is sitting at new all-time highs, being driven by resilient corporate profits, optimism that the economy has avoided a recession, and a continued boom in Artificial Intelligence (AI) spending. International and US small-cap stocks rallied along with their larger peers. Bonds, however, didn't share in the jubilation, dipping slightly by 0.78% as investors adjusted their expectations for how quickly interest rates might drop. Amid this backdrop, the Federal Reserve kept short-term interest rates steady but hinted at "maintenance cuts" later in the year, provided inflation keeps cooling off and the economy maintains its current course. 

An interesting transition unfolded among the stock market's leaders, the "Magnificent 7" — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla. While this group had previously generated almost all of last year's market returns, a divide emerged in 2024. The technology sector yielded its leadership in the quarter to the energy, financial, and industrial sectors which investors have overlooked for much of this bull market. These industries notched double-digit gains outshining the tech sector, benefiting from an investor pivot toward value stocks. Their strong earnings and attractive valuations painted a picture of a market broaden, signaling a healthier, more inclusive rally. 

Investment Strategy 

The quarter saw us holding steady, with no major adjustments to your investment strategy. Your portfolio is currently invested in line with your core investment strategy, meaning we do not have any over or underweight tilts in your portfolio. Our strategy and the underlying investments had a very good quarter. Our mix of growth and value within large-cap stocks surpassed the broader S&P 500. Despite a somewhat soft quarter for the bond market, your bond holdings bucked the trend, posting gains for the period. We plan to do our semiannual portfolio rebalance in early to mid-April. 

Outlook 

With the year beginning on such a strong note, the burning question on everyone's mind is, "What's next?" Our outlook remains optimistic for stocks and bonds. Let's dive into the reasons behind our forecast, starting with stocks. 

At the heart of our enthusiasm for stocks is the robust growth in corporate profits. Contrary to the usual trend of diminishing earnings estimates as the year progresses, estimates for 2024 and 2025 continue to climb, laying a solid foundation for this year's market rally. The broadening rally away from just the Magnificent 7 to the other 493 stocks in the S&P 500 is another positive. Seeing market rotation like this is important because it will prevent valuations from becoming too rich or evening heading into bubble like ranges. 

The resurgence of enthusiasm among corporate executives has sparked a flurry of activity on the mergers and acquisitions (M&A) front, with 11 deals this year already over the $10 billion level. For companies not engaging in M&A, share buybacks have become more common, with a projected increase of 13% this year. Both bode well for investors, signaling a strong vote of confidence for the current economic environment. 

Historical patterns further support our optimistic outlook. Since 1950, there have been 11 instances where the first quarter witnessed a gain of 10% or more. The average full-year gain in these years was a robust 21.4%, with an average increase of 6.5% across the final three quarters. Remarkably, none of these years ended in the red. Furthermore, the average drawdown in these years was around 11%, which is more favorable than the S&P 500's average intra-year drawdown of 14%. 

The bond market continues to offer compelling expected returns with yields near their highest levels in a decade. Starting yields are the best predictor of how your bond portfolio will perform over the next 3 to 5 years. We expect short-term rates to decline this year as the Fed is projected to cut rates three times. This will cause your high-yield savings accounts, money market funds, and CDs to have lower interest rates in the back half of the year. We think that rates further out on the yield curve (5 to 10 years) could start to creep higher since the economy is in good shape. This will impact things like mortgage rates, which might be slightly higher. Nevertheless, the high starting yields should cushion any impact from a minor rise in rates, ensuring that bond holdings remain a great choice for generating total returns over the upcoming year. 

Our stance remains optimistic for markets, yet we are far from euphoric. We advise against letting recent market gains tempt you into excessive risk-taking. Our current neutral positioning is deliberate, signaling that while conditions are favorable, we see no reason to shift toward a more aggressive or conservative approach. It's a reminder to navigate the promising yet unpredictable market with prudence and balance. 

Andrew Comstock, CFA