Quarterly Performance Update

U.S. Stocks Soared to Start 2024

Despite persistent inflation and rising Treasury yields, U.S. stocks rallied in the first quarter. Last year’s recession fears gave way to expectations for a soft landing and Federal Reserve (Fed) rate cuts. This sentiment, combined with excitement surrounding artificial intelligence and semiconductor stocks, helped push the S&P 500^® Index to 22 record highs in the quarter.

For the quarter, the S&P 500 returned 10.56%, as all sectors advanced except real estate, which declined modestly. The communication services sector was the top performer, gaining 16%, while the energy and information technology sectors returned 14% and 13%, respectively.

The Fed held rates steady at its January and March policy meetings, even as economic data remained resilient and inflation stayed above target. Additionally, policymakers continued to forecast three rate cuts for the year, insisting their still-restrictive monetary policy ultimately will slow the economy and inflation. Fed Chair Jerome Powell pledged patience, noting the Fed wants more confidence that core inflation is trending toward the 2% target.

Economic data released in the first quarter generally remained positive, but some indicators pointed to a potential slowdown. The unemployment rate edged up to 3.9% in February, its highest level since January 2022. The economy added more jobs than expected in February, but the government significantly revised downward the job gains for January and December.

Elsewhere, manufacturing slowed in March but remained in expansion territory throughout the quarter. Retail sales declined in January and remained weak in February, suggesting a potential cooldown in consumer spending.

Non-U.S. Stocks Posted First-Quarter Gains

Non-U.S. developed markets stocks (MSCI World Ex-USA Index) advanced but underperformed U.S. stocks. Similar to conditions in the U.S., inflation moderated but not yet enough to prompt a change in central bank policy. Encouraging economic data in Europe helped ease recession fears, which, along with rate-cut hopes, aided market sentiment in the quarter.

European stocks advanced but slightly underperformed the broader global market. The European Central Bank maintained its refinancing rate at a 22-year high and its deposit rate at an all-time high. Eurozone inflation moderated to 2.6% in February, down from 2.9% in December but still higher than the central bank’s target. The European services sector expanded for the second consecutive month. However, manufacturing continued to contract.

U.K. stocks also rose but trailed the broader global market. The Bank of England left rates at a 16-year high, awaiting signs that moderating inflation remains on a sustainable downward trend. The nation’s services sector slowed in March but continued to signal expansion for the fifth straight month. Manufacturing expanded in March for the first time since July 2022.

Elsewhere, Japan’s stock market rallied and significantly outperformed the broader market, despite the Bank of Japan lifting interest rates for the first time since 2007. Emerging markets (EM) stocks (MSCI Emerging Markets Index) returned 2.37% for the quarter, weighed down by negative performance from China.

Government Bond Yields Rose, and Bonds Declined

U.S. bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, returned -0.78% for the quarter, as Treasury yields resumed their upward march. All index sectors declined, with Mortgage-Backed Securities (MBS) and Treasuries underperforming and investment-grade corporates outperforming the index return.

Although the Fed maintained its forecast for three rate cuts in 2024, the bond market wasn’t convinced. Resilient economic data and persistent above-target inflation drove Treasury yields higher, reversing the prior quarter’s trend. The yield on the 10-year Treasury note ended March at 4.21%, up 0.33% from December 31. The two-year Treasury yield climbed 0.38% to 4.63%, and the yield curve remained inverted.

The headline Consumer Price Index (CPI) grew at an annualized pace of 3.2% in February, up slightly from January but down from 3.4% in December. Annual core CPI inched lower in February to 3.8%, compared with 3.9% in January and December. The annual core Personal Consumption Expenditures inflation rate – which measures the prices consumers pay for goods and services and changes in those prices and is the Fed’s preferred gauge – slowed to 2.8% in February, still higher than the Fed’s 2% goal.

Elsewhere, government bond yields in the U.K. and Europe also rose as inflation remained above central bank targets. The U.S. dollar appreciated versus other currencies, and Bloomberg’s dollar-hedged global bond index returned 0.01% for the quarter. EM bonds were mixed, with dollar-denominated securities generally rising and local-currency bonds declining.