Despite the escalating pressures between major countries, the equity markets delivered a healthy positive quarter. The first quarter saw broader investor acceptance of generative artificial intelligence, with the promise of enhanced productivity. The race to invest billions of dollars in artificial intelligence by companies and governments helped to advance equities globally.
The Federal Reserve expects to make up to three rate cuts this year, depending on the data. U.S. worker productivity increased by 2.7% for all of 2023, which helped offset wage gains without pushing up inflation. For the trailing 12 months ending in March, inflation is 3.5%, still above the Fed’s 2.0% target. There are some positives to inflation. For one, it allows companies to increase prices to address cost pressures and drive profits. The Fed increased rates 11 times this rate cycle, with the last increase in July of 2023. The Fed is now pausing to wait for higher rates to slow housing, automobile sales, business investment, and economic growth. There is no magic timeframe, but the often-quoted time is 12 to 18 months for rate increases to work through the economy. This suggests the Fed may be willing to make rate cuts later this year. The conundrum for the Fed is that the federal government’s continuous spending (i.e., the infrastructure bill) is making the braking of the economy more difficult and less predictable relative to history.
For the first quarter, the S&P 500 was up 10.56% (the largest first-quarter gain in five years), the Russell 2000 (small cap index) advanced 5.18%, and the international equity index (EAFE) was up 5.78%. Small value, both domestically and internationally, along with emerging markets, were all up in the 2-3% range. Real estate stocks were flat, while bonds were down 0.78% (Bloomberg US Aggregate Index). Remarkably, the equity gains occurred alongside a modest upward shift in interest rates, resulting in a 30 basis-point increase in the yields on two-year U.S. Treasury notes and a similar move for 10-year yields. Oil also increased but failed to derail the strong rally.
Our economy has been resilient, even while three major advanced economies slipped into recession (Germany, Japan, and the United Kingdom). The U.S. unemployment rate is still close to a 50-year low, and wage gains are above inflation. The U.S. consumer is showing signs of stress as credit card debt and car loans report a modest increase in delinquencies. However, the consensus scenario still has the economy coming in on a soft landing, which is slower growth but no recession.
As always, if you have any questions or would like to discuss your investments, please reach out. Your Resource Consulting Group advisor is here to help.
Benchmark Returns for the Period Ended March 31, 2024
| Quarter | 1 Year* | 5 Year* | 10 Year* | |
|---|---|---|---|---|
| US Treasury Bills (0-3 months) | 1.32% | 5.37% | 2.03% | 1.37% |
| Bloomberg US Agg Bond | -0.78% | 1.70% | 0.36% | 1.54% |
| Standard & Poor’s 500 | 10.56% | 29.88% | 15.05% | 12.96% |
| Russell 1000 Value (large cap value) | 8.99% | 20.27% | 10.32% | 9.01% |
| Russell 2000 (small cap) | 5.18% | 19.71% | 8.10% | 7.58% |
| Russell 2000 Value (small cap value) | 2.90 | 18.75% | 8.17% | 6.87% |
| MSCI Europe, Australasia and Far East (EAFE) | 5.78% | 15.32% | 7.33% | 4.80% |
| MSCI Europe, Australasia and Far East (EAFE) Small Cap | 2.40% | 10.45% | 4.94% | 4.70% |
| MSCI Emerging Markets | 2.37% | 8.15% | 2.22% | 2.95% |
| Wilshire REIT | -0.01% | 12.43% | 4.41% | 6.68% |
