Quarterly Financial Market Update: Q1 2024

April 16, 2024
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Key Takeaways

  • This year has already proven uncommon for both the market and the election cycle.
  • Cocoa has been the standout commodity this year, with contracts more than doubling, reaching a level twice as high as the previous record.
  • The Fed continues to indicate potential cuts, though Chairman Jerome Powell has stated they are in no hurry.

After the “everything rally” of 2023, many investors entered the year with high hopes for financial markets, the economy, and possible rate cuts. This optimism was well-founded as equity markets, particularly in the United States, have surged.

The S&P 500, Dow Jones Industrial Average, and NASDAQ all reached record highs at the end of the quarter. Initially technology-centric on Wall Street, this rally has now spread to Europe and Japan, with equities in these regions catching up to the United States.

By the end of March, indices from the United Kingdom, Germany, France, and Spain surpassed the S&P 500, indicating a broad-based market recovery beyond the technology sector.

Resilience of U.S. Treasury Yields

Despite initial expectations, the yield on the benchmark 10-year U.S. Treasury has shown resilience, rising from 3.860% at the beginning of the year to 4.20% at the end of the quarter.

Investors had initially anticipated six rate cuts from the Federal Reserve in 2024, reducing the benchmark rate to around 3.75% or 4%. However, strong inflation figures for January and February and robust economic growth prompted investors to adjust their expectations.

The Fed continues to indicate potential cuts, though Chairman Jerome Powell has stated they are in no hurry. This alignment of investor expectations with the Fed’s projections has led to an uptick in Treasury yields.

Commodities Experience a Surge

Gold reached a record high at $2,264 toward the end of the quarter, propelled by purchases from central banks diversifying their reserves and persistent retail demand from Chinese investors.

The conflict in the Middle East has significantly impacted oil markets, pushing the price of crude oil over $85 after trading in the $70s in December and January.

Cocoa has been the standout commodity this year, with contracts more than doubling to reach a level in March twice as high as the previous record.

This surge is driven by climate change's effects on small farmers in West Africa, who grow most of the cash crop, and the complexities of the future market, where a short squeeze could be accelerating upward price pressures.

What’s Been Driving Markets?

The Economy, Inflation, & the Fed

Persistent inflation in the United States and Europe is compelling investors to rethink their optimistic outlook for the global economy. This comes amid concerns that the lingering inflation could mirror the “stagflation” of the 1970s. Based on the economic data over January and February, the Fed has opted to keep the Fed Funds Rate unchanged at 5.25% to 5.50%.

In a tentative move, Fed officials have planned for 0.75% rate cuts by the end of the year without commitment to a specific timeframe.

The Fed’s latest projections, as shown in the “Dot Plot” below, indicate approximately 0.75% rate cuts in the next three years — 2024, 2025, and 2026. Yet, Federal Reserve Chairman Powell recently shared that the central bank is in no hurry to cut rates.

US Federal Dot Plot Map March 2024

The “Magnificent 7” Ride No More

The “Magnificent 7” tech stocks that contributed significantly to the market’s impressive gains in 2023 have exhibited mixed performance over the first quarter. While the group has accounted for 37% of the S&P 500’s YTD return, not all are still hitting it out of the park.

Nvidia continues to shine with a year-to-date increase of 82.28%. Meta Platforms and Amazon have also delivered solid performances, rising by 37.19% and 18.56%, respectively, while Microsoft has grown by 11.88%. Meanwhile, Alphabet, the owner of Google, has been relatively average at 7.98%.

However, some “Magnificent 7” members are faltering amidst this glowing performance. Apple has dipped by 10.93%. Moreover, Tesla experienced a significant drop of 29.25%, making it the worst-performing stock in the S&P 500 as the broader EV market decelerates.

How Investors Should React

This year has already proven uncommon for both the market and the election cycle. Traditionally, election years positively impact the stock market, with most gains appearing in the second half of the year.

The S&P 500 is already up over 10% YTD, closely resembling the average for full-year returns. The tech sector, usually the poorest performer during elections, is leading in 2024.

The last two election periods have seen some market volatility, and with the contentious nature of the 2024 elections, investor anxiety is expected.

We may see further volatility before and after the election. Still, historically and irrespective of political outcomes, investors who can look past the immediacy of the moment and stay focused on the long term are well-positioned for success.

As the chart below demonstrates, staying fully invested has been the best course of action regardless of political outcome.

Dow Jones Average

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