Q1 2024 in Review

Below is a transcript of this week’s video.

Hi, this is Ilona Vovk with Investment Strategy at Glenmede. 

Equity markets continued their march higher in Q1. The S&P 500 showcased remarkable strength, recording a 10.6% return and hitting new all-time highs, a milestone not seen since early 2022. Interest rates drifted notably higher after a volatile 2023, with 10-year U.S. Treasury yields ending the quarter at 4.20%, up from 3.88% to start the year.

Looking at market returns so far in 2024, there were mostly positive outcomes, with large cap equities leading the way. U.S. small caps saw more modest gains of 5.2%. Growth stocks outpaced their value counterparts, while international equity markets, in U.S. dollar-based terms, lagged behind – developed and emerging markets were up 5.8% and 2.4%, respectively. However, the Japanese equity market was a standout performer, reaching new highs for the first time since the fall of the Berlin Wall. Real estate, on the other hand, posted negative returns at -1.0%. Rising rates were enough to induce negative total returns for major investment-grade bond indices. Core taxable bonds posted -0.8% results and their municipal equivalents were down a more muted -0.4%. 

The ongoing economic expansion in the U.S. has continued into 2024, bolstered by the prospects for a soft landing. With real GDP growth at healthy levels and the unemployment rate near multi-decade lows, the foundation remains strong, though some recession risk lingers.

The Federal Open Market Committee held rates steady during their March meeting, marking the fifth meeting in a row without a change. This decision was anticipated, especially as inflation showed signs of reacceleration at the start of 2024. For instance, the core consumer price index's three-month annualized growth sits at 4.2%, back at levels seen in mid-2023. This is a key factor influencing the Fed's current stance on rates.

Given this economic backdrop, we've seen quite disparate equity performance, with size and growth sectors once again outperforming this quarter. The Mega cap index is leading the way, followed by large cap, the equal weighted index and then finally small cap. 

Internationally, Japan's market has notably outperformed, with a 10.6% return. This success is attributable to a mix of strong corporate earnings, supportive monetary policy and increasing recognition by investors of ongoing corporate reform efforts.

While concerns over market concentration and elevated valuations persist, not all equity markets are affected equally. U.S. small caps and Japanese equities present compelling value propositions, trading near or below fair values. This valuation gap, particularly between small and large caps, is at a historic divergence. And despite recent highs, Japanese stocks offer attractive valuations compared to their European counterparts. While a modestly defensive portfolio remains warranted due to heightened valuations and some recession risk, investors should tilt their equity exposure towards small caps and Japan.

So let’s summarize: Market returns were mostly positive in the first quarter of 2024 as expectations for a soft-landing rose; Longer-term rates drifted higher amid an ongoing Fed pause and stubborn inflation, placing some pressure on asset classes with the greatest rate sensitivity; Equity performance was quite disparate as size and growth outperformed again, and Japan reached a new all-time high for the first time since 1989; Extreme valuations are mostly confined to U.S. large growth, while Japan remains undervalued despite its recent performance run. Now while lingering recession risks and above-average valuations warrant some caution, fixed income and portions of equities look quite reasonable for long-term investors.

And with that, thank you for listening! And please don’t hesitate to reach out with any questions.