Key Takeaways
US stocks led global markets amid optimism for lower future interest rates.
High US valuations suggest the benefit of investing in undervalued international markets.
Communication Services in the US, and Information Technology abroad, dominated gains.
Manufacturing sector saw first expansion after contracting for 16 months.
Inflation improvements stalled, as CPI jumped to 3.5% in March.
Market review
Investors around the world maintained an optimistic outlook for the future throughout the early months of 2024, pushing several markets to new heights. For the first time since its peak in 2021, Nasdaq joined S&P 500 and Dow Jones in reaching new records. With inflation, economy, political or geopolitical developments relatively stable, investors shifted their focus to earnings growth and the anticipation of lower interest rates later in the year. Bolstered by a stable economy, the US stock market continued to excel, outperforming both developed and emerging international counterparts. In the first quarter, U.S. markets achieved a 10% gain, nearly doubling the performance of developed international stocks at 5% and quadrupling that of emerging markets at just 2.3%. The quarter's least successful asset classes were Global Real Estate and U.S. bonds, with declines of -1% and -0.78%, respectively.
Market Performance [Source: Quarterly Market Review – First Quarter 2024 by Dimensional Fund Advisors] [1]
The remarkable past performance of the US has elevated its valuation above historical averages, second only to the Netherlands[2]. Conversely, many countries such as Qatar, China and Japan are trading below their historical averages, highlighting the increased attractiveness of diversification to other markets. As can be seen on the chart below, timing when the foreign markets regain the lead is challenging, making the case for continuous international exposure more prudent.
U.S Stocks performance versus International Stocks performance by Charles Schwab[3]
Across all sectors, U.S. stocks experienced growth, with the notable exception of real estate. The best performing sector was Communication Services[4], featuring companies like Meta, Google, and Netflix. Foreign markets experienced a much broader range of performance across the sectors, with several of them, like Consumer Staples and Materials, experiencing declines. The best performing foreign sector was Information Technology, with companies like ASML that supplies chipmaker’s factories, or TSMC, a semiconductor manufacturer, returning 28%[5] and 31%[6] respectively. In the US, large firms outperformed smaller ones, and growth-oriented companies surpassed their value-oriented counterparts. For a clearer picture of what a large vs small company in the stock market looks like, we can look at the financial sector. Large banks with significant scale and resources like JPMorgan Chase had a great quarter with an 18%[7] gain. On the other hand, smaller regional banks like Comerica Bank, that lost -0.2%[8], had a much worse quarter. The funds used by VPI displayed a normal range of performance without the volatility seen in the previous year. The Schwab U.S. Large Cap ETF (SCHX) emerged as a the biggest outlier[9], delivering the highest return with 10.51%[10], with exposure to major companies like Microsoft, Nvidia, and Meta proving beneficial in both 2023 and 2024.
Commodities saw a reversal in performance, with a 2% growth in Q1 after an 8% decline in 2023[11]. Energy, buoyed by rising oil prices amid geopolitical tensions and optimism about the global economy, was a major contributing factor. Bond yields increased across all maturities in 2024 due to changing market expectations for future interest rates, with the 10-year treasury yield rising by 0.29% to 4.2%[12]. Fed funds rate, and closely related to it many short-term money market rates remained above 5%, much higher than longer rated treasury bond alternatives. This unusual situation, known as inverted yield curve, happens when markets expect short-term rates to drop significantly in the near future. Often this expectation is driven by fears of a looming recession that would require loosening financial conditions to provide a boost, but it can also indicate that high interest rates to fight inflation might soon no longer be necessary. For investors with a longer-term outlook, choosing bonds with longer maturities at these rates could still be advantageous, as the initial lower earnings could be offset by higher returns from locked in rates in the following months.
Comparison of Fed Fund Rates with 10-Year Treasury Yield by Charles Schwab[13]
Economy
The economy continued its strong performance, with real GDP growth for Q4 2023 at 3.4%, an increase from the 2.5% estimates in early January[14]. Though growth decelerated from Q3's 4.9%, it still marked the second-best quarter since Q4 2021's 7%[15]. The annual GDP for 2023 was up 2.5%, an improvement over 2022's 1.9%, with significant contributions from both private goods-producing and services-producing industries[16]. After 16 months of contraction, the manufacturing sector finally saw an expansion in March[17],joining the services sector that has been expanding since January 2023[18]. Early indicators suggest another promising GDP performance of 2.4%[19] for Q1 2024.
Real GDP by Industry [20]
A good sign for the economy is also the productivity growth within the labor force, which rebounded in 2023 and grew at 3.2%[21] in Q4, helping the economy to grow without too much pressure on inflation. The total number of nonfarm payrolls has seen an increase over the past two months, reaching a high of 303,000[22] not seen since May 2023. Overall, as we can see from the chart below employment reached the pre-pandemic levels back in June of 2022, and since then has returned to growth levels comparable to those before the pandemic. While many parts of the economy displayed positive trends recently, inflation was an exception as the improvement seemed to stall. The latest CPI report for March showed 3.5%[23], keeping the three-month average in Q1 at 3.24%[24], first quarter with no improvement since 2022 Q2. The disinflation trend in the Fed’s preferred inflation metric, PCE (Personal Consumption Expenditure), reversed in recent months too, and increased to 2.5%[25] in February. If the economy keeps up its good performance and low unemployment, and the inflation does not improve, we might need to wait for lower interest rates a bit longer.
Number of all employees in thousands [Data source: FRED®, Federal Reserve Bank of St. Louis]
Where to go from here?
During the first quarter of 2024, we witnessed significant growth and resilience in several markets, highlighted by the U.S. stock market and major technology companies setting impressive new records. However, it's important to note the performance disparities across different global markets and sectors, as well as fluctuations in the inflation rate. These factors remind us of the unpredictable nature of investing. Such variability underscores the importance of having a well-crafted financial strategy designed to navigate these uncertainties. If you have any questions or wish to discuss how these trends could affect your portfolio, please don't hesitate to contact us.
Authors: Richard Toth, CFA, CAIA
References
[1] US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]),Global Real Estate (S&P Global REIT Index [net dividends]), Commodities (The Bloomberg Commodity Total Return Index), US Bond Market (Bloomberg US Aggregate Bond Index), Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD])
[2] Based on standard deviation of valuation from respective historical median [Source: Quarterly Chartbook Q2 2024 by Charles Schwab]
[3] Source: Quarterly Chartbook Q2 2024 by Charles Schwab
[4] Source: Quarterly Market Review – First Quarter 2024 by Dimensional Fund Advisors
[5-8] Total 3-month return as of 3/31/2024 [Source: Morningstar Office]
[9] Based on quarterly Z-Score
[10] Total 3-month return as of 3/31/2024 [Source: Morningstar Office]
[11] Source: Quarterly Market Review – Fourth Quarter 2023 by Dimensional Fund Advisors
[12] Source: Quarterly Market Review – First Quarter 2024 by Dimensional Fund Advisors
[13] Source: Quarterly Chartbook Q2 2024 by Charles Schwab
[14-16] Source: U.S. Bureau of Economic Analysis
[17] Source: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/march/
[18] United States ISM Services PMI [Source: https://tradingeconomics.com/united-states/non-manufacturing-pmi]
[19] Federal Reserve Bank of Atlanta’s GDPNow as of 4/10/2024
[20] Source: U.S. Bureau of Economic Analysis
[21-22] Source: U.S. Bureau of Labor Statistics
[23] Source: U.S. Bureau of Economic Analysis
[24] Three month average of the year-over-year CPI.
[25] Source: U.S. Bureau of Economic Analysis
Disclosures
VanderPol Investments, LLC (“VPI”) is a registered investment adviser located in Michigan. VPI may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
This presentation is limited to the dissemination of general information regarding VPI’s investment advisory services. Accordingly, the information in this presentation should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from VPI. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Any client examples were hypothetical and used to demonstrate a concept.
Past performance is not indicative of future performance. Therefore, no current or prospective client should assume that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by VPI), or product referenced directly or indirectly in this presentation, will be profitable. Different types of investments involve varying degrees of risk, & there can be no assurance that any specific investment or investment strategy will suitable for a client’s or prospective client’s investment portfolio.
Various indexes were chosen that are generally recognized as indicators or representation of the stock market in general. Indices are typically not available for direct investment, are unmanaged and do not include fees or expenses. Some indices may also not reflect reinvestment of dividends.
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