Global stock markets continued rising in the first quarter of 2024, extending last year’s gains. The S&P 500 index of large US stocks led the way among major indexes, with a 10.6% gain for the quarter. Inflation continues to decline, albeit more slowly, and 2024 is projected to be a good year for corporate earnings.
All of this is especially remarkable considering we were supposed to be in a recession by now. Instead, the US economy surged ahead in 2023, and it continues to defy the skeptics. At the start of 2024, economists had been forecasting 1% growth in Gross Domestic Product (GDP) in the first quarter. As of April 1, a commonly cited estimate of GDP (The Atlanta Federal Reserve’s “GDP Now” tracker) was projecting much more robust growth of 2.8% instead. In recent years, US growth has significantly led the Euro Zone (growing twice as fast since 2019) and Japan (ten times as fast).
Can it continue? Investors seem to be betting it can, given the rising market, but two factors are likely to be particularly important: interest rates and employment.
First, short-term interest rates are expected to decline throughout 2024. The market is projecting that The Federal Reserve will start cutting interest rates in June, which will help much of the economy continue to grow (and reduce the cost of the country’s ballooning debt). For this to happen though, inflation will need to continue to decline, and it is not at all clear that the market’s projection of interest rate cuts will come to pass so quickly.
Second, to hold down inflation and keep worker shortages in check, the number of total workers needs to continue to grow. In this regard, immigration has been a big help. In fact, the biggest driver of the expansion of the US work force since the start of the Covid pandemic has been immigration. According to The Economist the American-born labor force is actually a little smaller than just before the pandemic, while the foreign-born labor force has increased by 4 million, or 16%, since the end of 2019. As the political climate becomes increasingly
anti-immigrant, dependence on immigration to expand the workforce could become an issue for the economy if stricter immigration policies are enacted.
International markets rose in the first quarter as well, but are still trading at much lower multiples as growth expectations continue to be lower in much of the rest of the world. The spike in energy prices from Russia’s invasion of Ukraine impacted Europe much more than the US, and many European governments did not provide the same level of stimulus that helped kick off growth in the US after Covid hit. Additionally, the recent artificial intelligence boom has been somewhat US-centric, given the plethora of AI-focused tech firms in the US.
Stocks
The Russell 1000 index of large US companies gained 10.3% in the first quarter of 2024. The market broadened out from the technology-led spike in 2023 and Energy was the best performing sector in the first quarter as oil prices jumped, followed by economically sensitive Industrial stocks. Financials rounded out the top three, while Real Estate lagged with a loss for the quarter.
Smaller companies underperformed their larger counterparts for the quarter. The Russell 2000 index gained 5.3% for the quarter, after surging 14.0% in the fourth quarter of 2023.
International stock markets added 5.8% during the quarter, as measured by the MSCI EAFE index of developed country stocks in dollar terms. In local currency terms, international markets actually gained a respectable 10.0%, but a rising dollar hurt returns in USD terms. Emerging markets lagged again, rising just 2.4%, as China’s stock market continued to decline.
Bonds
Bond markets have not changed significantly in recent months. The unusual situation of short-term bonds having higher rates than longer term bonds is persisting, as the market continues to expect short-term rates to decline in the future.
Investors are still playing a guessing game of when, exactly, the Federal Reserve will reduce rates (after the Fed stopped increasing rates after July 2023). In general, markets have reduced their expectations a bit in that regard. The current consensus is for just three downward revisions this year, starting in June. As a result of this more gradual expectation for declining rates, long term rates edged up in the first quarter, and the 10-year Treasury yield rose from 3.88% at the end of 2023 to 4.20% at the end of the first quarter.
The rise in long-term rates hurt longer-term bond prices, and the Bloomberg US Aggregate bond index declined slightly, by 0.8% for the quarter as a result. Meanwhile the Schwab US Aggregate Bond ETF annualized yield ticked up a bit and is now paying 4.4%.
Currencies and Commodities
After hitting a recent low toward year-end 2023, the US Dollar has strengthened in the first quarter against a basket of foreign currencies (as measured by the US Dollar Index). This has hurt foreign stock returns and foreign (unhedged) bond returns.
Meanwhile, the price of oil rebounded from $72 at the end of the year to $83 at the end of the first quarter. Average gasoline prices have also risen as a result. Natural gas prices, on the other hand, declined sharply in the first quarter, reaching lows last seen during the height of the pandemic. The cause has been a combination of a long-term impact of the massive supply of gas discovered in shale formation of the US since 2000, and a short-term impact of a mild winter this year.
Finally, gold prices were up over 8% in the quarter. Some analysts have pointed to global central bank buying combined with near-record levels of domestic buying by Chinese investors.
Looking Ahead
Despite the growth of the US economy and the rising stock market, one key indicator has continued to puzzle many observers. Consumer sentiment, as measured by the University of Michigan survey, stayed stubbornly low. Most key indicators, from rising consumer spending to low unemployment suggest that individuals should be buoyant – after all, the widely predicted recession in 2023 very much did not happen – but consumers continued to say they are not optimistic.
It takes a while for people to change their outlook, but the latest consumer sentiment data shows this might be turning around. Consumer sentiment increased slightly from February to March, and more significantly compared to last March. Critically, consumers are gaining confidence that inflation will continue to decline. Overall, sentiment has still only reached just above the midpoint between the pre-pandemic level and the low reached in June 2022.
Why is this important? There is evidence that consumer confidence gives meaningful clues as to the economy’s strength, both in the present and the future. Also, economic sentiment has widely been seen as important to presidential elections, with positive sentiment favoring the incumbent. The consumer confidence survey is therefore likely to be watched very closely in the coming months.
Lastly, we want to note a few of the remaining risks to the economy. First, we get a lot of questions about the US election. Historically, presidential elections have not been predictive of market turns, but this one does seem particularly charged. On the one hand, both candidates have been in office before, and the markets have done well under both. On the other hand, a Trump victory could lead to more extreme changes in trade policy and fiscal spending (among other things), especially if Republicans are in control of Congress, which creates uncertainty. Another risk, as the US economic recovery lasts longer, and as consumer spending continues to rise, is increasing consumer debt levels. The percent of credit card and auto loans going into delinquency now exceeds pre-pandemic levels. Overall, delinquency rates are still not historically high, but they do bear watching.
At the moment, markets seem to have a positive outlook about an economy that seems not too hot and not too cold. Of course, as Stanford Professor Scott Sagan once said, “things that have never happened before happen all the time”, so we should be on guard for unexpected events. We continue to believe that a diversified portfolio will help protect against unexpected market events that happen all the time.