Current market environment performance of dynamic, risk-managed investment solutions.
By Tim Hanna
Despite geopolitical tensions and higher interest rates, global equity markets continued their upward march in the first quarter of 2024, a rally that started in the third quarter of 2023. The S&P 500 achieved gains of more than 10% in back-to-back quarters, a feat witnessed only eight times since 1950. To provide some perspective, the S&P 500 has averaged around a 10% annual return over the past 30 years.
From a technical standpoint, the continuation of this trend was largely due to strong price momentum, with markets setting new highs through the first quarter. On the fundamental side, economic data was resilient. A renewed enthusiasm for artificial intelligence, inflation returning to its target, and ongoing optimism for rate cuts this year also drove market performance.
In terms of size and style leaders for the first quarter, large-capitalization stocks outperformed small-capitalization stocks, and growth investment styles outshined value investment styles.
Foreign markets also posted gains in the first quarter, though performance varied significantly at the country level. Global markets, excluding the U.S., outperformed emerging markets. However, economic growth within developed international markets continued to be sluggish. Several countries, including the U.K., Japan, Finland, and Ireland, faced recessions. Despite these challenges, the anticipation of monetary easing helped support foreign markets in the first quarter.
In the U.S., the Communication Services, Information Technology, and Energy sectors led the charge for the quarter. In contrast, Real Estate was the worst-performing sector. Defensive sectors such as Utilities and Consumer Defensive also performed poorly. Consumer Discretionary, which is considered a cyclical sector, also struggled in the first quarter.
The bond market faced challenges in the first quarter of 2024, moving in a downtrending sideways pattern, a stark contrast to the strong upward movement seen in the last quarter of 2023. The Bloomberg Barclays US Aggregate Bond Index, a bellwether for bonds, reported negative returns. Longer-duration bonds underperformed their shorter-duration counterparts. High-yield bonds saw positive returns, while investment-grade bonds tracked closer to aggregate bonds.
Internationally, bond markets didn’t deviate significantly from the experience of U.S. aggregate bonds. The decline in bond prices was mainly due to expectations for less aggressive and more delayed rate cuts in 2024 than markets had initially expected.
Gold experienced a significant rally in the first quarter, reaching all-time highs in March. This surge was driven by a weakening U.S. dollar and favorable technical factors, including strong momentum and the ability to break through important psychological thresholds. These elements combined to sustain the creation of new highs throughout March.
The first quarter of 2024 highlights persistence in momentum during trending periods. Despite geopolitical tensions and higher interest rates, equity markets experienced significant gains with lower-than-average volatility. Bond markets adjusted to revised expectations regarding the timing and extent of rate cuts, while gold rallied to all-time highs. This period provides valuable insight into market movements continually adjusting investor expectations within the market, which is a forward-pricing mechanism.
Performance trends for the quarter
As equity markets saw strong returns in the first quarter, we continued to see success with our systematic, dynamic, risk-managed approach to investment management. About 96% of our strategies were profitable for the quarter. The top-performing strategies tended to be aggressive equity strategies, which took advantage of upward movements in that class.
Tactical bond strategies mostly struggled for the quarter. While such strategies can falter when the bond market changes direction, they often perform well when markets consistently trend up or down. The first quarter saw a downtrending sideways channel in aggregate bonds, influenced by rising interest rates.
Among our risk-profiled strategies, there was a high positive correlation between risk and return. More aggressive strategies gained more for the quarter, taking advantage of market movements.