April 2024
US Economy: Signs of green shoots.
Some economic data surprised on the upside in March, with an upward revision in U.S. Q4 GDP to 3.4% annualized, personal spending at its fastest pace since Jan. 2023 (+0.8% in March and 3% annualized), and U.S. manufacturing activity expanding for the first time since Sept. 2022, along with expansion in global manufacturing. Meanwhile, U.S. unemployment ticked up to 3.9%, the highest level since Jan. 2022.
US Stocks: Rally rollout.
Every sector of the S&P 500 offered a positive return by some margin in March, and the strongest performance came from outside the usual suspects of technology and consumer discretionary. Energy (+10.6%), utilities (+6.6%) and materials (+6.5%) led U.S. stocks, as these previously lagging sectors seemed to offer relative value in the eyes of some investors. Similarly, small–cap stocks outperformed large–cap stocks during the month.
Foreign Stocks: AI + monetary policy.
International equity returns were on par with U.S. markets. Within developed markets, the Eurozone (+4.2%) outperformed on the rising likelihood that the ECB would cut interest rates beginning in June. Meanwhile, emerging markets where bookmarked by Taiwan (+7.9%) benefiting from the AI-fueled boom in semiconductors and Egypt, whose market lost a third of its value in dollar terms as the country devalued its currency to qualify for IMF funds.
Fixed Income: Steady on Fed support.
The Fed kept its key interest rate unchanged as it telegraphed a rosier outlook — GDP growth of 2.1% for 2024 — and less selling of bonds on the Fed balance sheet. Overall, U.S. fixed income was positive with investment–grade bonds up nearly 1% in March. Junk bonds (+1.2%) led the pack due to higher yields and investors anticipating less growth in defaults. Mortgage-backed securities (+1%) got a boost from the potential for fewer bond sales by the Fed.
Real Assets: More than an inflation play.
While still a laggard relative to public equity markets so far in 2024, infrastructure equities (+4.6%) were one the strongest performing segments in public financial markets in March, aided by the same valuation tailwinds that supported utilities and energy. Commodities (+3.3%) also performed well, with gold futures (+8.3%) accounting for the bulk of the gains as speculators bet on deteriorating economic conditions, lower interest rates and a weaker U.S. dollar.
Alternatives: Focus on distressed credit.
Private credit in Europe and U.S. continues to look attractive and arguably more so as signs of distress have risen meaningfully, if not dramatically. At the moment, health care and pharmaceuticals are where the majority of defaults are occurring, but similar stress can easily leak into other segments. Historically, patient investors have been able to benefit from timely asset class exposures in illiquid markets that are experiencing capital dislocations.
Source of data: Bloomberg
Equities Total Return
| MAR | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 3.2% | 10.6% | 29.9% |
| U.S. Small Cap | 3.6% | 5.2% | 19.7% |
| U.S. Growth | 1.8% | 11.2% | 37.9% |
| U.S. Value | 5.0% | 8.6% | 20.2% |
| Int’l Developed | 3.3% | 5.8% | 15.3% |
| Emerging Markets | 2.5% | 2.4% | 8.2% |
Fixed Income Total Return
| MAR | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.9% | (0.8%) | 1.7% |
| TIPS | 0.8% | (0.1%) | 0.5% |
| U.S. High Yield | 1.2% | 1.5% | 11.0% |
| Int’l Developed | 0.7% | (0.7%) | 0.9% |
| Emerging Markets | 0.2% | 1.5% | 6.5% |
| Tax-Exempt | |||
| Intermediate Munis | (0.1%) | (0.3%) | 2.0% |
| Munis Broad Mkt | (0.1%) | (0.3%) | 3.2% |
Non-Traditional Assets Total Return
| MAR | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 3.3% | 2.2% | (0.6%) |
| REITs | 1.8% | (1.3%) | 8.0% |
| Infrastructure | 4.6% | 1.3% | 4.1% |
| Hedge Funds | |||
| Absolute Return | 0.7% | 1.9% | 5.1% |
| Overall HF Market | 0.9% | 2.6% | 6.1% |
| Managed Futures | 3.5% | 9.7% | 12.3% |
Economic Indicators
| FEB-24 | AUG-23 | FEB-23 | |
|---|---|---|---|
| Equity Volatility | 13.0 | 17.5 | 18.7 |
| Implied Inflation | 2.3% | 2.3% | 2.3% |
| Gold Spot $/OZ | $2229.9 | $1848.6 | $1969.3 |
| Oil ($/BBL) | $87.5 | $95.3 | $79.8 |
| U.S. Dollar Index | 121.6 | 122.6 | 119.5 |
Our Take
As we enter spring, much of the economic data we have seen continues to tow the line down the middle, providing as many reasons to feel optimistic as pessimistic. The labor market continues to cool but remains on a solid foundation, the housing sector hasn’t been phased much by high interest rates and consumer spending has seen a small bounce. Meanwhile, consumer confidence has slipped and inflation is a bit hotter than hoped.
Within this ambivalent context, two primary factors continue to drive asset class returns:
(1) Expectations for U.S. monetary policy, which have vacillated between a distinct headwind and tailwind over the last few years. Monetary policy was a headwind when the Fed began raising its target interest rate in early 2022 and reducing its balance sheet. But this is now a potential tailwind, with investors expecting the Fed to start cutting interest rates later this year. As sentiment has changed, risk assets such as U.S. equities have generally been lifted or lowered in unison, as boats by a tide. Lately, the outlook is for high tide given the anticipation for rate cuts, although not quite as many as had been thought just a few months ago.
(2) The potential boost from artificial intelligence. While the promise of artificial intelligence could be revolutionary for a wide array of businesses, only those companies with the most immediate ability to extract value from it have benefited at this point. Computer chip engineer Nvidia, for example, has gained more than 80% through March, a massive gain for three months, while most other companies and sectors have been left far behind. Utilities, for one, are up less than 33% total in the last five years. Given the “wow” headlines that Nvidia stock has been generating, it is understandable for investors to view economic and market conditions as quite rosy.
What Now
Could the U.S. stock market be overvalued? Some of it possibly, sure. But necessarily all of it? The point is not to argue whether tech is expensive or that utilities are particularly attractive but to underscore that valuations in the markets are not homogenous. One of our jobs as advisors is to dig into asset classes to understand those nuances when sourcing opportunities. To that end, in our Q2 Economic Commentary, due out later this month, we survey the current investment landscape with eye on anomalies that present opportunities.
Our overarching view remains the same: Given recent strong up moves in certain asset classes, portfolios should be engaging in disciplined rebalancing in line with long-term allocation targets. While we strive to minimize taxes on capital gains, the tax tail should not wag the dog in terms of disciplined rebalancing.
Currently, it is fair to say that the assets that appear most attractive to us on a risk-adjusted basis are those that help diversify the equity risk in our portfolios. For example, hedge fund and private credit strategies, as mentioned above, are some of the exposures that appear uniquely suited for an environment marked by an uptick in volatility and/or a dislocation in less liquid markets.
Within core fixed income, a primary diversifier, it may be a prudent time to top-up bond exposures that are likely to benefit if economic conditions and market sentiment deteriorate. Lastly, where applicable, it would be prudent for portfolios incorporating private capital investments to consider whether cash for upcoming capital calls can be parked in fixed income or money markets with competitive yields.
