Stocks Have the Best Q1 Since 2019; Bonds Rise in March, but Close Down for the Quarter
HIGHLIGHTS:
- New all-time highs were achieved for the NASDAQ Composite, S&P 500, and Dow Jones Industrial Average in March. The S&P 500 turned in a double-digit gain for the quarter—its best Q1 since 2019.
- Bonds made gains for the month after struggling to begin the new year in the face of rising rates. For March, bonds reversed some of the declines from earlier in the year, but Q1 results were largely negative (outside of high yield).
- The 10-year U.S. Treasury yield declined in March after rising the first two months of 2024. The yield closed February at 4.25%, and slipped modestly lower to 4.20% by the end of March.
- The U.S. economy continues to reflect growth. The third reading of Q4 2023 GDP was 3.4%, which surpassed expectations and the prior reading of 3.2%.
- The FOMC meeting in March largely confirmed earlier ideas laid out by the Fed. Primarily, that there will be rate cuts in 2024, but likely closer to 3 and the market has adjusted for this potential scenario. Chairman Powell acknowledged that the rate hike cycle is likely over and, while not in a hurry, rate cuts will likely be coming in 2024.
EQUITY MARKETS
Despite rate cut expectations being reduced by half by the market, stocks continued their rally since the end of 2023. Since the start of the year, each month has seen gains for the major market indices, and March was no different. The NASDAQ, S&P 500, and Dow Jones Industrial Average all recorded new all-time highs. Furthermore, the market rally broadened in March with value stocks outpacing growth, and small-caps outgaining their large-cap counterparts.
The better results of the S&P 500 Equal-Weight Index compared to the main S&P 500 Index for March reflected this broadening of the rally, but also signaled the strength of large-cap growth so far this year. Large-cap growth outperformed for the quarter, but value and small-caps closed that gap in March. Small-caps showed some strength in February after posting negative results in January and that momentum continued in March. See Table 1 for equity results for March 2024, Q1 20204, and calendar year 2023.
Table 1
| Index | March 2024 | Q1 2024 | 2023 |
|---|---|---|---|
| S&P 500 | 3.22% | 10.56% | 26.29% |
| S&P 500 Equal Weight | 4.46% | 7.91% | 13.87% |
| DJIA | 2.21% | 6.14% | 16.18% |
| Russell 3000 | 3.23% | 10.02% | 25.96% |
| NASDAQ Comp. | 1.85% | 9.31% | 44.64% |
| Russell 2000 | 3.58% | 5.18% | 16.93% |
| MSCI ACWI ex U.S. | 3.13% | 4.69% | 15.62% |
| MSCI Emerging Mkts Net | 2.48% | 2.37% | 9.83% |
2023 will be remembered for the dominance of large-cap growth and 2024 has started in a similar fashion. However, the market broadened once again in March as it had in late 2023. We believe the market could continue to broaden in 2024 with valuations more compelling in value, small, mid-cap, and international stocks.
International stocks continued to underperform U.S. equities with emerging markets among the weakest equity areas to begin 2024. Gains in March accounted for the year-to-date advance for emerging market stocks. We still see opportunities in international markets with valuations that are lower than the U.S. We also believe that the U.S. dollar will likely weaken over the short to intermediate-term as the Fed begins cutting rates in 2024.
Fixed Income
The rally in bonds to close out 2023 sent the 10-year U.S. Treasury yield sharply lower, closing last year at 3.88%. Most of 2024 has seen the yield move higher after such a sharp drop in a short time frame late last year. However, March saw yields drift lower, and this set up a better backdrop from fixed income returns for March. However, gains for the month were not enough to overcome declines from January and February and the quarter ended with most bond sectors down, with the exception being high yield bonds. After closing February at 4.25%, the 10-year U.S. Treasury yield ended March at 4.20%. See Table 2 for fixed income index returns for March 2024, Q1 2024, and calendar year 2023.
Table 2
| Index | March 2024 | Q1 2024 | 2023 |
|---|---|---|---|
| Bloomberg U.S. Agg | 0.92% | -0.78% | 5.53% |
| Bloomberg U.S. Credit | 1.23% | -0.41% | 8.18% |
| Bloomberg U.S. High Yld | 1.18% | 1.47% | 13.44% |
| Bloomberg Muni | 0.00% | -0.39% | 6.40% |
| Bloomberg 30-year U.S. TSY | 0.77% | -4.06% | 1.93% |
| Bloomberg U.S. TSY | 0.64% | -0.96% | 4.05% |
High yield bonds and credit posted solid returns for the month, but only high yield enjoyed gains for the first quarter when looking at these broad bond indices. High yield bonds often follow what is happening with stocks, so during a month and quarter where stocks performed well, it is not a surprise to see high yield bonds advance.
The other areas of the bond market have been more impacted by the general move higher in rates, except for the modest reprieve in March. We expect the 10-year U.S. Treasury yield to drift lower as we move through 2024 and believe it will be in a range between 3.25% and 4.5% during the year. We believe rates at the front end of the yield curve will decline as the Fed begins to cut rates in 2024.
We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment and that has served us well so far in 2024. We also believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. Furthermore, we believe that bond yields remain attractive even though rates have dropped from their October 2023 highs. In our opinion, having an active bond management approach makes sense in these volatile times.
Economic Data and Outlook
Data released in March (largely covering February), continued to show an economy that was growing. The final reading of Q4 GDP reflected an economy that grew stronger than originally estimated. With a 3.4% annualized growth rate, the final reading was ahead of expectations and the prior estimate of 3.2% growth for the U.S. economy. The Atlanta Fed GDPNow estimate for economic growth (as of March 29) shows the economy running at an estimated 2.3% growth rate for the first quarter of 2024. That pace is right in line with our Clark Capital GDP growth expectation for all of 2024 at 2.25%. We do expect growth to slow in 2024 from 2023, but we also think the odds favor a soft landing and not a recession at this point.
One ongoing reason we continue to expect growth in the economy comes from ongoing gains in the job market. Non-farm payroll additions were 275,000 in February, easily surpassing expectations of 200,000. However, January’s strong reading of 353,000 new jobs was revised sharply lower to “only” 229,000.
The unemployment rate moved up to 3.9% when it was expected to remain flat at 3.7%. Average hourly earnings grew by 4.3% on an annual basis in February as expected. As a consumer-based economy, strength in the job market has been a key driver of economic growth. Overall, the job market data for February appears a little cooler than the data from January, but it continues to reflect labor market strength. Some moderation in the job market could allow the Fed to cut rates more comfortably in the near future.
We are still in a situation with millions more job openings than unemployed people in the U.S. economy. We acknowledge that several tech companies announced layoffs early this year and we will monitor whether that becomes a bigger macroeconomic theme or whether it is more contained to the technology sector. Chart 1 shows the unemployment rate and job openings. As job openings have come down over the last couple of years, we have seen only a modest tick up in the unemployment rate, but this graph shows some initial convergence.
Chart 1
For illustrative purposes only.
With the current strength in the job market, we maintain our opinion that it seems unlikely that the economy would slow too drastically. However, even a modest slowdown in the job market could be a headwind to economic activity due to the central role that consumer spending plays in the U.S. economy. Moving into 2024, we expect the economy will slow, but that we will likely avoid a recession. Even if a recession developed, we believe it would be mild due to the strength of the consumer. We believe opportunities exist in the stock and bond markets under either a slow growth or mild recession scenario.
Inflation data for February was above expectations. The headline Consumer Price Index (CPI) showed an annual increase of 3.2%, which was higher than expectations of 3.1% for February. The core CPI showed an annual gain of 3.8% compared to expectations of 3.7%. The headline reading showed a faster annual increase than January, while the core reading was a slower annual increase in comparison. The headline Producer Price Index (PPI) rose by 1.6% on an annual basis in February when a 1.2% gain was anticipated. The core PPI had an annual increase of 2.0%, again, higher than expectations of 1.9%. We do not expect this sort of data to decline in a straight line and some periods of volatility should be expected. We would argue that the trend is still clearly showing improvements made regarding inflation and we believe that the Fed will cut rates during 2024 due to this improvement.
Focusing on the preferred inflation measure of the Fed, the Personal Consumption Expenditures (PCE) Index for February was in-line with expectations. The headline PCE Index had an annual increase of 2.5% in February as expected but this was above the 2.4% annual gain from January. The core PCE reading (the reading the Fed targets) was 2.8% – in-line with expectations and a modest improvement from December’s revised higher annual increase of 2.9%. Chart 2 shows the core PCE Price Index and the core CPI, which have both been trending lower since their rapid rise following the pandemic period.
Chart 2
Progress has been made on inflation. The Fed has indicated it believes the rate hike cycle is over and rate cuts will occur in 2024. To start the year, the market, based on the Fed Fund Futures, was anticipating too many cuts compared to what the Fed was indicating. After the FOMC meeting at the end of January and the “hot” CPI reading released in February, market expectations, according to the CME FedWatch Tool, showed 4 expected cuts in 2024. This reading has subsequently come down to 3, which is more or less in line with the Fed’s “dot plot” expectations of where the Fed Funds will end this year. It is notable that stocks logged a strong quarter even as rate cut expectations have been trimmed.
Housing data was stronger in February after the move higher in rates seemed to be a headwind to housing in January. Building permits, housing starts and existing home sales all surpassed expectations and all were above January’s level. Existing home sales were particularly strong at an annualized rate of 4.38 million, easily surpassing estimates of 3.95 million and the prior reading of 4 million. New home sales missed expectations and were just modestly below the prior month’s level. The S&P CoreLogic 20-City Index of home prices rose by 6.59% on an annual basis in January, fractionally below expectations but ahead of December’s annual increase of 6.15%. It will be important to see how housing reacts as interest rates have bounced higher from their 2023 close, but some initial weakness in housing in January was followed up by general strength in February. Chart 3 shows that housing starts and building permits have declined from the early 2022 highs but have largely leveled off over the last year.
Chart 3
At 47.8, the ISM Manufacturing Index for February was disappointing compared to estimates of 49.5 and the prior mark of 49.1. This marked the 16th straight month of manufacturing declines. (However, the streak was broken in March when this reading came in at 50.3 compared to expectations of 48.3 driven higher in part by better-than-expected new orders.) The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, slipped to 52.6 in February, which missed expectations of 53.0 and was a drop from 53.4 in January. The service industries have consistently shown growth in recent years and the surprise growth in manufacturing in March was a welcome sign. While one month is not a trend, it is a positive development to see improvement in the manufacturing sector. Recall, the dividing line between expansion and contraction for the ISM indices is 50.
The health of U.S. consumers is in constant focus due to the consumer’s significant role in the U.S. economy. Retail sales (ex. auto and gas) grew by 0.3% as expected in February. The preliminary University of Michigan Sentiment reading for March ticked modestly lower to 76.5 from the prior month reading of 76.9 and expectations of 77.1. The Conference Board’s Leading Index broke a two-year streak by recording a positive reading, a 0.1% gain for February when a -0.1% drop was expected. The leading economic index has been flashing a warning sign of slower growth that has yet to materialize to any real degree.
As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.
Investment Implications
Clark Capital’s Top-Down, Quantitative Strategies
The S&P 500 Index was positive for the fifth straight month and finished higher for the tenth time in the past thirteen months. Market breadth continued to improve with the equal-weighted S&P 500 Index outperforming the cap-weighted Index. Small-caps posted a fourth month of gains in the past five, with a resurgence in smaller, less profitable companies shifting away from the momentum and secular leaders. We believe the market is approaching overbought levels consistent with a pullback, but momentum suggests the long-term trend remains bullish, even if we have a correction.
Clark Capital’s Bottom-Up, Fundamental Strategies
The momentum style factor led the rally as market participation broadened in March with previously weaker sectors like large-cap value and small-caps gaining 5.0% and 3.6%, respectively. Since October, large-cap momentum has rallied 36.7%, outpacing the robust large-cap growth and Russell 2000 Small Cap gains of 29%. Most broad equity indices rest near all-time highs in concert with growing expectations of the S&P 500’s next 12-month earnings and near record profit margins.
ECONOMIC DATA
| Event | Period | Estimate | Actual | Prior | Revised |
|---|---|---|---|---|---|
| ISM Manufacturing | Feb | 49.5 | 47.8 | 49.1 | — |
| ISM Services Index | Feb | 53 | 52.6 | 53.4 | — |
| Change in Nonfarm Payrolls | Feb | 200k | 275k | 353k | 229k |
| Unemployment Rate | Feb | 3.70% | 3.90% | 3.70% | — |
| Average Hourly Earnings YoY | Feb | 4.30% | 4.30% | 4.50% | 4.40% |
| JOLTS Job Openings | Jan | 8850k | 8863k | 9026k | 8889k |
| PPI Final Demand MoM | Feb | 0.30% | 0.60% | 0.30% | — |
| PPI Final Demand YoY | Feb | 1.20% | 1.60% | 0.90% | 1.00% |
| PPI Ex Food and Energy MoM | Feb | 0.20% | 0.30% | 0.50% | — |
| PPI Ex Food and Energy YoY | Feb | 1.90% | 2.00% | 2.00% | — |
| CPI MoM | Feb | 0.40% | 0.40% | 0.30% | — |
| CPI YoY | Feb | 3.10% | 3.20% | 3.10% | — |
| CPI Ex Food and Energy MoM | Feb | 0.30% | 0.40% | 0.40% | — |
| CPI Ex Food and Energy YoY | Feb | 3.70% | 3.80% | 3.90% | — |
| Retail Sales Ex Auto and Gas | Feb | 0.30% | 0.30% | -0.50% | -0.80% |
| Industrial Production MoM | Feb | 0.00% | 0.10% | -0.10% | -0.50% |
| Building Permits | Feb | 1496k | 1518k | 1470k | 1489k |
| Housing Starts | Feb | 1440k | 1521k | 1331k | 1374k |
| New Home Sales | Feb | 677k | 662k | 661k | 664k |
| Existing Home Sales | Feb | 3.95m | 4.38m | 4.00m | — |
| Leading Index | Feb | -0.10% | 0.10% | -0.40% | — |
| Durable Goods Orders | Feb P | 1.00% | 1.40% | -6.20% | -6.90% |
| GDP Annualized QoQ | 4Q T | 3.20% | 3.40% | 3.20% | — |
| U. of Mich. Sentiment | Mar P | 77.1 | 76.5 | 76.9 | — |
| Personal Income | Feb | 0.40% | 0.30% | 1.00% | — |
| Personal Spending | Feb | 0.50% | 0.80% | 0.20% | — |
| S&P CoreLogic CS 20-City YoY NSA | Jan | 6.60% | 6.59% | 6.13% | 6.15% |
Past performance is not indicative of future results. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Material presented has been derived from sources considered to be reliable and has not been independently verified by us or our personnel. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Investing involves risk, including loss of principal.
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CCM-993
