Q1 2024 Market Review and Update

By Osborn Williams & Donohoe on April 25, 2024

Q1 Market Recap

U.S. equity markets continued the strong trend set last quarter with the S&P 500 closing up +10.16% for the best performance to start a year since 2019. The S&P 500 is up 28% since its October low. This marks the first time since the fourth quarter of 2011 and the first quarter of 2012 that the S&P 500 has experienced back-to-back double digit quarterly gains (+11.2% in the fourth quarter of 2023) and only the 13^th time since 1928 this has occurred. Earnings for the Standard & Poor’s 500 Index grew +7.5% year over year.

The Nasdaq closed +9.11%, while the Dow and Russell 2000 closed +5.62% and +4.8%, respectively. Away from equities, the U.S. dollar rose +2.9%, gold gained +8% after an +11% gain in Q4 and WTI crude prices increased + 16% alongside record U.S. oil production. In fixed income markets, 2- and 10-year Treasury yields increased by 37 basis points (bps) and 32 bps to 4.62% and 4.20%, respectively. Economic growth was further supported by job gains (+229,000 in January and +275,000 in February), housing activity is rebounding with single-family housing starts up +35% year over year, and Institute of Supply Management (ISM) manufacturing data expanded in March for the first time since October 2022. Additionally, markets are being supported by the continuation of fiscal stimulus and underlying economic momentum from both the U.S. labor market holding strong with higher wages and a recovery in manufacturing.

Strong Jobs Data and Manufacturing Rebound Are Catalysts for Economy¹

At the beginning of 2024, futures markets implied 1 ½ percentage points worth of interest rate cuts in 2024, which fell to seven tenths of a rate cut at the end of March amid a solid economy and lack of recession fears. A “higher-for-longer” interest rate narrative has surfaced given the sustained economic growth experienced in the first quarter. We continue to expect the Federal Reserve to be patient, as the economy has proven its ability to absorb these higher rates with low unemployment and above-trend growth. With inflation down significantly from its peak and consumer confidence rising, profitability expectations continue to expand broadly; markets project earnings to grow +8.6% in 2024.

Stocks are one of the best leading indicators for economic growth, and the recent rally in stock prices has correctly foreshadowed a significant pickup in corporate earnings.  When investors buy stocks, it usually indicates optimism about the future performance and economic outlook. Rising stock prices also tend to lead to higher consumer spending and investment in business initiatives, which can help fuel economic growth. Essentially, the stock market’s movements often precede broader economic trends, making it a valuable indicator for investors and policymakers alike.

Ten of Eleven Sectors See Positive Return in Q1

Market broadening was one of the main trends in Q1. The S&P equal-weighted index returned 7.9%, compared to the market-cap weighted 10.6% gain. In March, the equal-weighted index outperformed the market-cap weighted by over 1.3 percentage points.² Moreover, the dispersion between growth and value strategies narrowed into the end of the first quarter.

Historically, dividends have produced approximately 45% of the total return from stocks over time and we may be entering a period when capital appreciation moderates and the dividend component of return takes on more importance.  Dividend growth strategies have several long-term advantages:

1. Steady Income Stream: Dividend growth investing focuses on buying shares in companies that consistently increase their dividends over time. This approach provides a growing stream of income, which is particularly appealing for retirees or those planning for retirement.
2. Long-Term Wealth Creation: Reinvested dividends compound over time, leading to exponential growth in an investor’s portfolio. By holding dividend growth stocks, investors can benefit from both capital appreciation and a reliable income stream.
3. Inflation Hedge: Since dividend payouts can increase over time, they help preserve the purchasing power of your investment income. As inflation rises, dividend growth can offset the impact on your overall returns.
4. Passive Income: Dividend growth investing allows investors to build a passive income stream by living off dividends. Consistent dividend increases contribute to financial stability and independence.

Q1 2024 S&P 500 Sector Performance³

Communication services (+15.8%) led the S&P 500, followed by energy (+13.7%), technology (+12.7%), financials (+12.5%) and industrials (+11%). Laggards included consumer discretionary (+5%) and utilities (+4.6%), with the one decliner being real estate (-0.5). Cyclical sectors experienced a turnaround this quarter given the positive growth outlook.

23 of the 25 Global Industry Classification Standard (GICS) industries closed Q1 in the green, following 24 out of 25 seeing positive performance in Q4. Moreover, 22 of the 25 GICS industries are up in absolute terms over the last two quarters – which has only happened on 10 occasions since 1999.

This breadth is rare and reflects what we have been anticipating. A rise in valuation dispersion across S&P 500 industries is also supportive of active management and seeking opportunities within market inefficiencies.

Q1 Themes and Stories

The Federal Reserve’s battle with inflation remains the headline for markets in 2024, thus far. The Federal Reserve chose to keep the policy rate unchanged in its March meeting, pointing towards the need for more data to be confident that inflation is lowering to 2%. The committee maintained their estimate for three 25 bps cuts this year and lowered their estimated number of cuts in 2025 while increasing Gross Domestic Product (GDP) and terminal rate estimates. Interestingly, the Federal Reserve also lowered its expected unemployment rate for 2024 to 4.0% from 4.1%.

Households continue to hold record levels of “cash” on the sidelines, primarily in money market funds to the tune of $6.1 trillion. Last year, money market inflows grew $1 trillion. Risk-on assets have still seen a strong bid with the limited impact that policy rate has had on the consumer and corporate profits. Q2 brings two more Federal Open Market Committee (FOMC) meetings at the end of April and mid-June, and the chances are growing that we likely don’t see a cut until the fall time frame. Currently, the CME FedWatch tool is projecting a 3% chance for a 25 bps cut in late April and a 61% chance for a 25 bps cut in June.⁴

Outside of the Federal Reserve, Artificial Intelligence (Al) was the most popular conversation in equity markets. By 2030, it is estimated that the market for Al will be nearly $2 trillion, up from $200 billion last year.⁵ It is important to note that the effects Al will provide are expected to be felt in all corners of the economy, not just semiconductors. A need for increased energy production, technological advancements and new medical technologies are all examples of second derivatives stemming from broad Al adoption.

Sustained Trends into Q2

Our outlook remains positive. The economic backdrop shows no sign of a looming recession, as many projected would come last year. A pause in rate hikes, lower inflation and continued fiscal spending combined to create easing financial conditions in the first quarter.  

Hotter-than-anticipated reads on common inflation measures such as the Consumer Price Index (CPI) and Producer Price Index (PPI) have revealed that the last mile toward the Federal Reserve’s stated 2% inflation goal may be more difficult to achieve.

Additionally, the market rally this quarter was much broader than the previous – a very healthy sign in our view. The often referenced “Magnificent 7,” the major theme carrying the market last year, was less apparent this quarter. This signals AI has the potential to augment productivity across a diverse array of industries. With earnings growth broadening, cyclical sectors seeing a rebound and the economy trending upward, we are positioned for companies with under-appreciated growth catalysts, strong leadership, and growing end-markets to lead performance in the second quarter.

Return for Selected Indices⁶

New Team Members Spotlight

As our firm continues to expand and evolve, we are thrilled to have welcomed three new team members last year: Michael Donohoe, Jeff Ouellette, and Kyle Tolle. In our commitment to providing you with a continued level of excellence and service, we recognize the importance of continuity as we grow. Michael, Jeff, and Kyle each bring a wealth of skills, perspectives, and experiences that will enhance our ability to serve you even better. Their dedication to client service and professional experience greatly aligns with our firm’s values and ethos.

Michael Donohoe, Associate Portfolio Manager, joined the OWD team in January 2023. He comes with 6 years of investment experience; most recently at Aspiriant Wealth Management. Michael has taken a leading role in enhancing our research and financial planning efforts in addition to supporting client relationships.

Jeff Ouellette, Portfolio Manager and Director of Alternative Investments, joins the team with 9 years of investment experience and joined us from HarbourVest Partners. Jeff is leading the efforts to introduce our clients to private markets asset classes in addition to taking on a role as a portfolio manager with clients.

Kyle Tolle, Senior Client Service Administrator, joined us from Fund Evaluation Group with 22 years of experience working for financial services firms. Kyle focuses on portfolio administration and client service.

With their addition, we reaffirm our commitment to delivering the standards of excellence and service you’ve come to expect. We are confident that their contributions will further strengthen our ability to meet and exceed your expectations. We are excited about the possibilities that lie ahead and look forward to continuing our mutual journey of growth and success.

All of us at Osborn Williams and Donohoe thank you for your continued trust and confidence. We welcome any opportunity to be of assistance to you and your family members.

¹ Source: FactSet. As of April 2, 2024.

² Source: FactSet. As of April 1, 2024.

³ Source: Bloomberg. As of March 31, 2024.

⁴ Source: CME Group. As of April 2, 2024.

⁵ Source: Statista. As of April 1, 2024.

⁶ Source: Bloomberg. As of April 22, 2024.