Q1 2024 Financial Markets Newsletter
S&P 500 Shines with Stellar Q1 Performance
As we step into the second quarter of 2024, it’s imperative to reflect on the remarkable journey of the S&P 500 during the first quarter. Closing at an impressive 5,254.35 points, the S&P 500 registered a significant 10.16% increase, marking its best first-quarter performance since Q1 2019. This historic surge was mirrored by the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which increased 10.06% in the same period.
The index not only reached but surpassed multiple historic milestones, breaking the 5,000-point mark for the first time on February 8, followed by the 5,100 and 5,200 levels on subsequent days. This led the S&P 500 to close at an all-time high, with nearly 40% of the trading days in Q1 setting new record highs—a milestone not reached since Q1 2013.
This extraordinary performance stems from a combination of factors, notably the Federal Reserve’s dovish pivot late in 2023, which set the stage for anticipated interest rate cuts in 2024. Moreover, the burgeoning excitement around artificial intelligence significantly fueled the rally, especially within the technology sector.
Tech Giants Lead the Charge
The technology sector, and particularly mega cap technology stocks, have been at the forefront of the S&P 500’s Q1 rally. Companies like Nvidia, Google, and Facebook have seen their valuations soar, driven by the AI revolution that continues to redefine the landscape of technology and business.
Nvidia, a leading player in the AI and deep learning space, has seen its stock price skyrocket, reflecting the growing demand for its GPU technologies in AI applications. Google and Facebook, have also both capitalized on AI to enhance their services and drive efficiency, further bolstering their market positions and stock performance.
Interest Rate Changes and Their Implications in Q1 2024
The first quarter of 2024 witnessed significant changes to interest rate policies, influencing market dynamics and investor sentiment. Following the Federal Reserve's dovish stance in late 2023, the anticipation of rate cuts materialized in Q1, offering a stimulative backdrop for financial markets. These interest rate adjustments aimed at fostering economic growth amidst evolving global economic conditions, had a reverberating impact. On the one hand, they buoyed investor confidence, contributing to the liquidity influx and propelling equity valuations, particularly in growth-sensitive sectors like technology. On the other hand, however, the lower interest rate environment prompted a reassessment of fixed income strategies, pushing investors towards higher-yielding, albeit riskier, assets. This recalibration of investment portfolios underscores the intricate balance between seeking yield and managing risk in a changing interest rate landscape. Consequently, central bank policy maneuvers were a pivotal factor, shaping the Q1 market narrative while highlighting the intricate intersection between monetary policy and financial market performance.
US 10-year Treasury Bond Yield
In Q1 2024, the US 10-year Treasury bond yield demonstrated volatility, indicative of broader economic trends and market sentiment. Starting at 4.05% and peaking at 4.33%, the yield settled at 4.21% in February, marking a 12.27% year-over-year increase and reflecting a 3.95% rise from the previous month. This upward trajectory in yields, closely monitored by investors for implications on broader financial markets and economic forecasts, underscores the sensitivity of bond yields to economic data, central bank policies, and geopolitical events.
Areas of Strong ROI in Q1
Some of the most some notable areas that provided strong returns in Q1 were bitcoin (BTC-USD) and oil (CL1:COM), along with the Communication Services (XLC) sector, Energy (XLE), and Information Technology (XLK). At the other end of the spectrum the areas that suffer the most during the first quarter were Real Estate (XLRE).
Top 5 Q1 S&P 500 Performers
Super Micro Computer (SMCI) +255%
Nvidia (NASDAQ:NVDA) +82%
Constellation Energy (CEG) +58%
Deckers Outdoor (DECK) +41%
Micron Technology (MU) +38%
Bottom 5 Q1 S&P 500 Performers
Tesla (NASDAQ:TSLA) -29%
Boeing (NYSE:BA) -26%
Charter Communications (CHTR) -25%
MarketAxess Holdings (MKTX) -25%
Humana Inc. (HUM) -24%
Economic and Market Outlook
The Federal Reserve’s outlook for three rate cuts in 2024, amidst a strong economic growth and a resilient labor market, paints a promising picture for the remainder of the year. While inflation readings have been slightly above expectations, the overall economic data supports a continuation of the bullish trend observed in Q1.
It is worth mentioning, as highlighted by Alex King of Cestrian Capital Research, that despite the bull market’s red-hot trajectory, skepticism remains among some commentators. However, the current momentum suggests a continued upward trend, barring significant shifts in inflation dynamics or unforeseen economic shifts.
From an investment strategy perspective, BlackRock's outlook suggests that despite the strong start to 2024, investors should remain discerning due to high valuations. The equity risk premium for the equal-weighted S&P 500, which is closer to the long-term average, implies that opportunities might lie beyond the dominant mega-cap stocks. This calls for a strategic approach to stock selection, emphasizing the potential of active management during this period.
Looking forward, AI's impact on the market remains a significant focus. With expected growth in AI-related lawsuits and regulations, sectors involved in AI, especially big tech companies, might face challenges related to intellectual property, ethical concerns, and accountability. This scenario suggests a cautious approach towards tech investments, considering potential regulatory headwinds.
Canada Q1 2024 Update
In the first quarter of 2024, Canadian stocks painted a complex picture, reflecting broader economic pressures and sector-specific dynamics. Retail consumers in Canada faced significant challenges, primarily due to elevated interest rates and the prevalence of variable mortgages, which added strain to already highly indebted households. This financial stress not only dampened consumer spending but also raised concerns about the broader health of the retail sector. In response to these headwinds, Canadian banks, noting the potential risk of loan defaults, proactively expanded their loan loss provisions. This cautious approach underscored the banking sector’s attempt to fortify against the economic turbulence driven by high consumer debt levels and a cooling housing market.
On the brighter side, the first quarter saw a noteworthy rally in mining stocks, particularly those involved in gold and uranium. The initial surge was fueled by investors seeking safe havens amidst market volatility. On the other end, as the quarter progressed, the momentum in lithium cooled off, reflecting a normalization of investor expectations and a recalibration of market values. Despite this deceleration, the mining sector’s performance highlighted the ongoing interest in and the potential of Canada’s natural resources. These developments in mining stocks are indicative of broader trends affecting the Canadian market, where sector-specific drivers and economic fundamentals intersect to shape the investment landscape.
ArcStone’s Perspective
At ArcStone Securities and Investments Corp., our position aligns with the broader market optimism. We remain bullish on the prospects of the S&P 500 and, particularly, on the technology sector driven by advancements in artificial intelligence. Our investment strategy and thesis continue to emphasize diversification, with a keen focus on sectors poised for growth amidst the evolving economic landscape.
As we navigate through 2024, we remain committed to providing our clients with strategic insights and investment solutions that align with these dynamic market conditions. The journey of the S&P 500 in Q1 shows the resilience and potential of the market, setting a favorable tone for the year ahead.