Global equity markets performed strongly during the first quarter. Even though the Federal Reserve shifted gears on rate cuts, equity markets focused on the AI narrative and a generally solid economy, which benefited US large growth stocks the most. Returns for small cap, value and non-US were more subdued, yet positive. Equity volatility remained low and declined during the quarter as equities had positive returns across the board. US economic growth remained strong over the first quarter. Growth has been weaker in developed countries outside the US. China’s economy continued to struggle but exited a multi-month deflation spell in Q1. Overall, this paints a picture of a resilient global economy and aligns with our expectations of a moderate slowdown in global growth in 2024 and 2025 while avoiding a hard landing.
US inflation was above expectations in the first quarter of 2024. Headline CPI was 3.5% year-over-year through March, while core CPI came in at 3.8%, a more than two-year low. Inflation is expected to decline further as remaining inflationary components such as shelter roll over. Labor markets have shown signs of softening from tight levels as seen by the unemployment rate increasing slightly, which also should help inflation fall back to target. Resilient inflation figures caused the Fed to pivot back towards more cautionary rhetoric and deferring rate hikes to future meetings. Nonetheless, the Fed left the fund rate projection for year-end unchanged, which implies up to three cuts this year.
Global equities maintained their momentum for the second quarter in a row, with the MSCI ACWI returning 8.2%. The S&P 500 rallied strongly during the quarter, up 10.6%, led by the Magnificent 7. International developed stocks returned 5.8% in Q1, far behind US equities due to their lower tech exposure and slower growth. Emerging market equities returned just 2.4% in Q1, lagging global equities by a wide margin.
Within fixed income (bonds), the Bloomberg US Aggregate Index returned -0.8% during the quarter. Treasuries returned -1.0% and corporates returned -0.4%. The yield curve shifted higher during the quarter. US high yield bonds returned 1.5% during the quarter, as high yield spreads fell 24 basis points to ~3.0% in a risk-on market.
Global developed REITs returned -1.0% during Q1, underperforming broader equity markets. Core infrastructure stocks were flat during the quarter. Higher rate sensitivities for both sectors were a headwind this quarter. Commodities and natural resources had strong performance during the quarter.
There were plenty of geopolitical events this quarter including ongoing conflicts in the Middle East and Eastern Europe and a major terror attack in Russia. Oil prices increased over Q1, driven primarily from a shifting assessment of the demand and supply outlooks. Over the quarter, strong equity returns pushed equity valuations further into richly valued territory. Weak fixed income performance has made those valuations more attractive on a rate level but the risk on environment has pushed credit spreads towards historic tights.
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