April 15, 2024 -

Here in our home state of Georgia the flowers are blooming, pollen is blanketing the landscape, and winter coats are being traded in for short sleeves "It’s springtime and we have just wrapped up a beloved sporting event here in our corner of the world – the Masters golf tournament." Although we’ve not even reached “the turn” for 2024 yet, we thought it appropriate to evaluate the “scorecard” as it currently stands at the end of the first quarter.

Through the end of March and close of the first quarter, economic data has been “par for the course.” January readings for Q4 2023 Gross Domestic Product (GDP) came in strong at +5.8% year over year, although down slightly from Q3 figures¹. Inflation, which has drawn considerable attention from investors over the last few years, continues its downward trajectory thanks to moderation in shelter, dining, and transportation costs². Through the first quarter, year over year changes in U.S. Consumer Price Index (CPI)readings have come in slightly above expectations at just above three percent, but still well below recent peaks of roughly nine percent in mid-2022³. U.S consumers continue to show some resiliency with strong wage growth and unemployment figures well below historical average⁴.

The remainder of this “round” may well depend upon how the Federal Open Market Committee (FOMC) navigates the “back nine”. Twenty-four months ago, Chairman Powell and company were surveying a tough “lie” with post-COVID inflation spiking and economic activity still reeling from supply chain shocks, stimulus-driven spending, and increasing geopolitical uncertainty as Russian/Ukrainian tensions were escalating into full on war. Now, after embarking on the steepest and fastest rate hiking cycle since the late 1970s,the FOMC is looking to finish strong here on the “18th hole”. We entered the year amid market expectations of 6-7 rate cuts during 2024⁵. Now, after additional supportive economic data releases and dovish commentary from the committee, markets are pricing in just three quarter-percent rate cuts over the course of the year⁶. The severity and timing of those cuts remain the key questions and will likely play a role in the path financial markets take through the rest of the year. “Course conditions” have been tough, but the play has been exceptional from the FOMC thus far. Now they are focused on sinking a final crucial “putt” to deliver on their soft landing.

We believe U.S. equity markets are performing well leading off 2024. The S&P 500 Index rose 3.8% for March and posted another consecutive positive double-digit return quarter at 10.6%. Mega-cap technology stocks picked up the year where they left off in 2023 and continue to contribute to index returns. Small-cap U.S. stocks, as represented by the Russell 2000 Index, turned in a strong March and were modestly positive at 5.2%on the quarter after a roughly 6% drawdown to start the year. Equity markets have been stair stepping their way up with volatility largely muted for the year. The CBOE Volatility Index (VIX), which measures the near term expected volatility intensity of U.S. equities, has remained well below historical averages thus far in 2024. Arguably, there are some signs of froth in markets as the artificial intelligence (A.I.) industry and cryptocurrencies seem to be experiencing a dramatic resurgence. But, nonetheless, domestic equity markets have started off 2024 with a strong initial “tee shot”.

International equities got off to a slower start on their first few “holes”. Developed international markets, as represented by the MSCIEAFE Index, were up 3.5% for March bringing their first quarter returns to5.8%. Financials were the strongest contributing sector amid a general shift of most central banks toward more accommodative monetary policies while consumer staples lagged, particularly within Western European countries. Interestingly, Japan's sleepy equity markets, which have largely been dormant for most of the post-“Dot Com Bust” era, have seen some recent resurgence as government and industry regulators have begun efforts to re-focus staid old domestic conglomerates on more efficient capital management and shareholder returns. International emerging markets seem to be mired in the “rough” early in the "round”, with the MSCI EM Index (EM) returning a modest 2.7% for March bringing their quarterly return to just 2.4%. Taiwan, India, and Saudi Arabia led the pack while China continues to be a drag on stronger broad EM returns.

Domestic bond markets continue to find themselves influx. With the FOMC signaling that short-term rates have likely peaked, the bond market must now reckon with potentially higher mid- and long-term rates as they await more certainty around future economic activity and inflation. To that end, from year end 2023 through the first quarter Treasury rates have seen notable increases in all tenors beyond 18 months with most rates rising somewhere between 0.30% and 0.35%. The Bloomberg U.S. Aggregate Bond Index, which includes U.S. Treasuries, corporates, and asset backed debt, was up 1.1%for March bust still down roughly 0.8% for the quarter. Yield curve changes were a drag to returns but credit spreads, i.e. the yield differentials between corporate bonds and U.S. Treasuries, have compressed to lows not seen since early 2022 signaling a more accommodative credit environment for issuers. It may be a bit painful for bond investors at the moment; but we believe absolute yields remain attractive (particularly compared to recent history), short rates may be poised for softening in the near term which should be additive to returns, and the recent moves in longer term rates represent a significant step towards a more normalized yield curve and investment environment. There may be a few tough “shots” ahead but bond markets should round out the “scorecard” nicely over the balance of the year.

Diversifier asset classes such as real estate and commodities have been a mixed bag to lead off the year. Global and domestic real estate delivered solid March performance but are down modestly on the quarter. Real estate, both here at home and abroad, continues to struggle with higher interest rates and the ability to roll maturing debts. Sustained thematic headwinds like work-from-home and internet retail shopping also continue to play out, influencing returns on office and retail properties. Commodities were broadly positive with precious metals and energy posting significant returns for both March and the first quarter. Spot gold touched new all-time highs while gasoline and Brent crude oil futures crept up mid-double digits and are now back to mid-2022 levels.

The “course” has held a few surprises, but the “round” is off to a solid start so far in 2024. Equity markets have continued their strong momentum from the end of 2023. Bond markets have shown some resiliency in the face of a fluctuating rate environment. There will certainly be plenty of “sand traps” ahead but we believe a steadfast focus on a sound process over near-term obstacles is good advice for investors and golfers alike.

Hunter Brooks
Portfolio Manager

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