What an impressive start to the year for US stocks! Not only did the S&P 500 Index achieve its largest first-quarter gain since 2019, it did so amidst significant challenges.
Despite the tragic and deadly wars in Gaza and Ukraine, escalating tensions between major global powers, the further weaponization of investment restrictions, and the unsettling news of three major advanced economies slipping into recession (Germany, Japan, and the United Kingdom), the S&P 500’s gains accelerated and broadened. The benchmark surged 10.2%, outpacing the Dow Jones Industrial Average (5.62%) and the Nasdaq Composite Index (9.11%). Remarkably, these gains occurred alongside a notable shift in expectations for interest rates that resulted in a 30 basis-point increase in the yields on two-year US Treasury notes and a similar move for 10-year yields. The 13% rise in Brent oil also failed to derail the strong rally.
This stock market strength amidst seemingly adverse global conditions is striking, especially given domestic political uncertainties in key countries and the limited amount of global policy coordination in the face of problems common to many countries. The strength can be attributed to two main factors: bottom-up and top-down influences.
From a bottom-up perspective, the first quarter saw much broader investor adoption of the promise of generative artificial intelligence, as illustrated most vividly by Nvidia Corp.’s 82% surge. This was supported by growing recognition of the innovative technology's potential to enhance productivity across many sectors and in a durable manner.
From a top-down perspective, the rally's expansion beyond the technology sector was fueled by a combination of US economic exceptionalism and the Federal Reserve's relatively dovish stance on monetary policy.
Powered by a solid labor market generating jobs that topped forecasts, the US economy grew at an annualized rate of some 4% in the second half of 2023 while other economies fell into recession. Meanwhile, the Fed remained unfazed by three hotter-than-expected inflation readings in the first quarter. Indeed, despite these readings and an increase in the Fed’s own projection for 2024, Chair Jerome Powell remarked that the inflation story remained “essentially unchanged.” This gave comfort to market participants, driving a wedge between the prospect of higher-for-longer interest rates and continued Fed support for markets.
It's no surprise, therefore, that the rally extended beyond equities to many other assets. This included Bitcoin, which soared 64% and some deem as providing “risk off” exposure and others as “risk on,” and gold, which jumped 8.09% and is considered “risk off” but was bolstered by the challenges facing the Fed in finally getting the rate of inflation down to its 2% target. The rally crossed borders, with a notable surge in Japanese equities (despite the Bank of Japan’s first rate increase in 17 years and its withdrawal of yield curve control) and greater investor interest in emerging-market stocks.
The first quarter of 2024 reminded us that US stocks can thrive amidst considerable uncertainty, especially when backed by a transformative sector narrative and a supportive central bank. Investors should cheer this environment while being mindful of the need to extend the rally’s drivers beyond these two influences.
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