The first quarter of 2024 has been a period of relative stability and growth in the equity markets. As we navigate this dynamic environment, investors need to understand the key trends that have shaped the market and how they might influence investment strategies. Let’s delve into some of the significant themes from the past quarter.
S&P 500 Performance: A Balanced Appreciation
The S&P 500 has shown solid performance in Q1 2024. Unlike the concentrated gains seen in 2023, where a handful of tech giants—often referred to as the "Magnificent Seven"—dominated the market, this year has seen a more balanced appreciation across various sectors. This broader participation indicates a healthier market structure and suggests that growth is being driven by a wider range of industries.
For the average investor, this diversification within the S&P 500 reduces the risk associated with heavy reliance on a few major companies. It underscores the importance of maintaining a well-rounded portfolio that benefits from the collective strength of various sectors rather than betting heavily on a single market segment.
The Strong US Dollar: Implications and Opportunities
The US dollar has continued to show strength against other major currencies. This strength has a twofold impact:
Pressure on Pricing: A strong dollar can make US exports more expensive and less competitive abroad. This could slow the earnings growth of US-based multinational companies that rely heavily on foreign markets.
Investment Power: On the flip side, a robust dollar increases the purchasing power of US investors when buying foreign assets, presenting potential opportunities for those looking to diversify their portfolios internationally.
Investors must be aware of these dynamics and consider how currency fluctuations might affect their holdings. Diversifying investments to include international assets can mitigate some risks associated with a strong domestic currency.
Value of the US Dollar since 2002
Value for the US Dollar in 1Q24
Source: Wall Street Journal as of January 2, 2024. Past performance is not indicative of future results.
Interest Rates and Yields: Watching the PCI Data
Interest rates and yields have remained a focal point for investors, with much attention on data such as the Consumer Price Index and Jobless claims. This data is closely monitored as it provides insights into inflation trends, which in turn influence the Federal Reserve’s decisions on interest rates.
When the Fed wants to control interest rates, it will raise and lower the short end of the yield curve, and the balance of the curve will adjust as buyers and sellers readjust pricing. Raising rates is a mechanism to slow, stop, and reverse inflation towards the Fed's goal of 2%. In July 2023, the Fed's policy rate peaked at 5.25% - 5.50%, and it's been held there since. Going into 2024, the market was pricing in 6 to 7 rate cuts in the calendar year, but the data has not yet shown that inflation is on a sustainable downward trajectory. In 1st quarter 2024, the expectation of rate cuts this year was revised down to 2-3 with some saying we won't see a rate cut until 2025.
The market is generally in a wait-and-see mode. Lower interest rates generally benefit equities by reducing companies' borrowing costs and increasing consumer spending. However, the timing and magnitude of these changes remain uncertain.
Investors should stay informed about inflation indicators and interest rate trends, as these factors will significantly shape market conditions in the coming months.
Looking Ahead: Diversification and Caution
As we move forward, our advice to clients remains centered on several key principles:
Focus on Diversification: It’s essential to spread investments across different asset classes, sectors, and geographies. Diversification helps manage risk and reduces the impact of volatility in any single market segment. The magnificent seven in the last 12 months have driven large-cap growth to a sizable return above the other categories. That is driven by the last 9 months of 2023 and is NOT the case in the 3 months of 2024.
Source: Morningstar, Russell benchmarks shown. Past performance is not indicative of future results.
Caution Against Concentration in US Equities: While the US market has been a strong performer, it’s prudent not to concentrate too heavily in US equities. Global diversification can provide a buffer against domestic market fluctuations and tap into growth opportunities in other regions. US growth has been strong in 2023 relative to the rest of the world but all driven by the magnificent seven's outsized performance. On average, 33 of the global top 50 companies are international and not US.
Source: FactSet, MSCI, J.P. Morgan Asset Management. (Left) Bloomberg, Russell, Societe Generale. Asia tech ex-Japan: MSCI AC Asia ex-Japan Information Technology Index, European Luxury Goods: MSCI Europe Textiles Apparel and Luxury Goods Index, U.S. Growth: Russell 1000 Growth Index, European renewables: Societe Generale European Renewable Energy Index, Europe biotech: MSCI Europe Biotechnology Index. (Right) Graph was made by ranking all the companies in the MSCI All Country World Index by performance on a yearly basis and determining the top 50 performers using their total return in USD. Companies are listed in no particular order. Excluded companies whose market capitalization does not make up at least 0.01% of the MSCI All Country World Index in the year listed. Guide to the Markets – U.S. Data are as of March 31, 2024.
Avoid Election-Driven Investments: With the 2024 election on the horizon, it’s tempting to make investment decisions based on anticipated political outcomes. However, history has shown that markets are resilient and often unpredictable around election times. Focusing on long-term investment strategies rather than short-term political events is best.
Reduce Exposure to the Magnificent Seven: The declining performance of the Magnificent Seven relative to the broader market may be a signal of potential market weakness. Reducing exposure to these companies and rebalancing your portfolio can help mitigate risk and align with a more diversified investment approach.
Source: Morningstar, Factset, Standard and Poors, JP Morgan Asset Management. Past performance is no guarantee of future results.
Conclusion
The first quarter of 2024 has provided a relatively stable and balanced market environment. As always, the key to successful investing lies in staying informed, diversifying wisely, and maintaining a long-term perspective. By understanding the current market trends and adjusting your strategy accordingly, you can navigate the complexities of the financial landscape and work towards your investment goals.
If you have any questions or need personalized advice, please don’t hesitate to reach out. We’re here to help you make informed decisions and achieve your financial objectives.
The information presented in this blog post is intended for informational purposes only and should not be construed as financial advice or an offer to buy or sell any securities. The analysis and opinions expressed are based on publicly available data and the author's interpretation of current economic trends. However, they do not take into account your individual financial circumstances, risk tolerance, or investment objectives.
Investing involves inherent risks, and past performance is not necessarily indicative of future results. The value of your investments can go down as well as up, and you could lose some or all of your principal. Before making any investment decisions, it is crucial to consult with a qualified financial advisor who can assess your specific situation and recommend suitable investment strategies based on your risk tolerance and investment goals. Always conduct your own thorough research and due diligence before making any investment decisions.
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