As we welcome spring and the start of the second quarter, we look back on how the markets fared in the first quarter of 2024 in our latest Market Highlights. It turns out that the news is good, but not for the reasons you might expect.
Strong Returns from the S&P 500
The S&P 500 followed up its 11.69% performance in Q4 of 2023 with a 10.56% return in Q1 of 2024.1 That’s two strong quarters in a row of returns that exceed average annual returns! Fixed income couldn’t keep up the momentum, however, as the US Aggregate Bond index returned -0.78% in Q1 after a 6.82% gain in Q4.1
Higher interest Rates for Longer
The stock market’s rise in Q4 was attributed to optimism surrounding the Fed’s eventual cutting of interest rates. As of the end of 2023, market participants were pricing in six rate cuts for 2024 (expecting the Federal funds rate to finish the year at 3.77%).2 After Q1, market participants are now pricing in only three rate cuts for 2024 (expecting the Federal funds rate to finish the year at 4.64%).2 If the optimism around lower rates was premature, why did the stock market rise instead of fall in Q1? Well, rates don’t need to be lowered yet because the economy is still running strong which is supporting earnings.3
Expect Some Volatility Ahead
Even “good” years for the market have their downturns. The chart below shows calendar year returns against intra-year drawdowns. Even with a 10%+ start to the year, that’s not to say there won’t be a significant drawdown some time this year. There are plenty of current risks including two major conflicts abroad and the upcoming US presidential election.
We’re in a delicate balancing act where good news for the economy could enhance performance (through higher earnings) or could impede performance (through more restrictive monetary policy which leads to higher costs for financing). So, while the market is looking good so far this year, it’s important to keep a balanced perspective and continue managing risks prudently.
Sources & Disclosures
1. Data from Kwanti.com based on the S&P 500 Total Return index and the Barclays US Aggregate Bond index
2. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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