Riding the Bull: Strong Start for Stocks in Q1 2024, But Fixed Income Falters

Positive economic data and a dovish Federal Reserve kept investors in high spirits throughout the first quarter of 2024. The US economy grew more than expected in Q4 2023, and purchasing managers’ indexes (PMIs) remained firmly in expansionary territory, fueling a positive outlook. This optimism translated to strong performances in global equities, with the MSCI ACWI Index rising a healthy 7.4%. However, the party wasn’t universal, as fixed income markets faced headwinds from rising interest rates.

Equity Markets Take Center Stage

The first quarter belonged to stock market bulls. Global equities enjoyed a broad rally, with developed markets leading the charge. The US market emerged as the clear winner, with the S&P 500 Index jumping an impressive 10.6%. This stellar performance was driven in part by the continued dominance of the so-called “magnificent seven” tech stocks, which reported robust earnings growth in Q4 2023. Overall, US companies delivered solid earnings growth of 8%, further bolstering investor confidence.

Across the Pacific, Japan defied expectations and emerged as another star performer. The Topix Index surged by a remarkable 18.1% in the first three months, even as the Bank of Japan began to normalize its monetary policy by ending negative interest rates and scaling back asset purchases.

While most regions enjoyed positive returns, emerging markets lagged behind. The MSCI EM Index managed a gain of only 2.4%, as lingering concerns about China’s economic slowdown cast a shadow over investor sentiment. The MSCI China Index did manage a rebound of 12.3% from its January lows, fueled by better economic data during the Lunar New Year holiday and some easing measures from the People’s Bank of China.

The UK stock market, however, remained a lone wolf. The FTSE All-Share Index delivered a meager gain of just 3.6%, weighed down by its value bias and the UK’s recent descent into a technical recession.

Fixed Income Feels the Heat

While equity investors were popping champagne corks, the fixed income crowd faced a more challenging quarter. The Bloomberg Global Aggregate Index, a broad measure of the bond market, suffered a decline of 2.1% as inflation remained stubbornly high. Hotter-than-expected inflation data in both January and February prompted investors to reassess their expectations for future interest rate cuts, leading to a rise in bond yields.

Within the fixed income universe, there were pockets of relative resilience. Higher-yielding bonds, such as those issued by European sovereigns and high-yield credit, fared better due to their lower sensitivity to interest rate changes. In contrast, US Treasuries, considered the safest fixed income asset class, underperformed with a return of -1.0%.

Looking Ahead: Will the Bull Market Charge On?

The first quarter of 2024 painted a picture of a robust global economy, with expectations of dovish monetary policy fueling investor optimism. This positive sentiment translated to strong gains in global equities, particularly in developed markets. However, the outlook for the rest of the year is not without its uncertainties.

The continued resilience of the global economy and the possibility of rate cuts later in 2024 could provide continued support for equity markets. However, some markets, particularly those in the US, appear to be priced for perfection, raising the risk of profit-taking if economic or corporate earnings growth falters. Additionally, the ongoing impact of geopolitical tensions and persistent inflationary pressures remain a concern for investors.

Overall, the first quarter of 2024 was a positive one for investors, but the coming months may present a more complex and potentially volatile market environment. Business leaders, investors, entrepreneurs, and government officials alike should stay informed of these developments as they navigate the ever-evolving economic landscape.

Source: BSP Treasury