KEY TAKEAWAYS MARCH • The Fed held policy steady, but raised guidance on growth and inflation for 2024. • The Bank of Japan reversed its negative interest rate, yield curve control, and quantitative easing policies. • Global equity markets rallied for a fifth consecutive month. • Yields fell modestly and fixed income – rates and spread sectors – delivered positive returns. • All real asset categories were positive.Domestic equity markets saw their fifth consecutive month of gains, with the S&P 500 and Russell 3000 indices each up by 3.2%. NVIDIA led domestic equity gains with a 14.2% increase, but overall, sectors like consumer discretionary and IT underperformed, influenced by declines in Apple and Tesla.

In contrast, the energy, utilities, and materials sectors excelled due to investor rotation towards real assets. Despite a robust year-to-date market performance, S&P 500 earnings growth expectations were revised downward. Internationally, developed and emerging markets also enjoyed gains, with notable performance in tech sectors due to rising AI demand. The Bank of Japan ended its long-standing negative interest rate and yield curve control policies, causing significant currency dynamics.

Fixed income remained steady, while real assets, especially in the energy sector, benefited from higher oil prices and geopolitical tensions, contributing positively to market dynamics.

BANK OF JAPAN PIVOTS; YEN DOES NOT The BoJ ended a period of unorthodox and ultra-accommodative policy, scrapping the world’s last negative interest rate policy by raising rates for the first time in 17 years. It also ended its yield curve control program and ETF purchases. While the announcement was expected by many, the reaction of the yen was not. Already the worst performing developed market currency in 2024, the yen fell further despite these actions, at one point hitting a 34-year low vs. the greenback. Myriad factors impact currency dynamics, but the continuation of the carry trade, resilient U.S. economic data, and movement of assets out of Japan have contributed to yen weakness. The long-awaited inflection point for the yen may have to wait until we see a reversal of these trends Global Equities

Domestic equity markets posted their fifth consecutive month of positive performance, with the S&P 500 and broader Russell 3000 indices gaining 3.2% in March.  NVIDIA was the largest individual contributor to performance, extending its historic run with a 14.2% gain.  However, the “Magnificent 7” stocks as a group lagged the broad market, dragged down by sell-offs in Apple (−5.1%) and Tesla (−12.9%).

As a result, the consumer discretionary (+0.8%) and IT (+1.6%) sectors were the two worst performing sectors.  Instead, investors rotated into real asset sectors; energy (+10.5%) was by far the best performer for the month, followed by utilities (+6.9%) and materials (+6.4%).  For the month, U.S. value stocks outpaced their growth counterparts by roughly 320 bps; however, growth remained ahead by 260 bps year-to-date (YTD).

The strong YTD market was at odds with corporate earnings revisions.  Over the first three months of the year, the expected S&P 500 earnings growth ticked down from 11.5% to 10.6%.  With prices up and projected earnings down, the forward P/E for the S&P 500 expanded from 19.7x to 21.0x.

Markets abroad enjoyed similar success.  Like their U.S. counterparts, developed non-U.S. equities notched a fifth consecutive monthly gain, gaining 3.2%.  Euro area countries (+4.1%) fared the best during the month, but it was Japan (+3.0%) that stole headlines as the Bank of Japan (BoJ) announced an end to its controversial negative interest rate and yield curve control policies.

Emerging markets (+2.5%) continued their momentum from February, buoyed by tech-heavy markets such as Taiwan (+7.9%) and South Korea (+5.2), which benefited from rising AI-related demand.  While much of the direct AI design and consumption are levered to developed markets, the technology is heavily reliant on hardware and other inputs such as logic and memory chips produced by EM companies.  Some of these higher profile companies include Taiwan Semiconductor (+12.1%) and Samsung Electronics (+11.4%), which have grown to represent the largest individual positions within the MSCI EM Index and are widely held by active EM equity managers. China (+0.9%) was modestly positive on signs of economic improvements, including better than expected manufacturing activity and continued incremental government policy support, particularly aimed at the battered property sector.  Brazil (−1.8%) cooled off on fears of a return to heightened government influence over some of its large state-owned businesses and a reversal of privatization efforts under the previous administration.

Fixed Income

The Federal Reserve held policy steady at its March meeting, with no changes to interest rates or to the run-off of the balance sheet.  In its Summary of Economic Projections, the Fed raised its GDP and inflation forecast and continued to guide for a strong labor market. The Federal Open Market Committee dot plot continued to project up to three rate cuts in 2024.  While markets agree with this assessment, the prospects of stronger growth, stickier inflation, and an overall resilient economy suggest it is possible the Fed may not need to ease policy this year.  The Fed lowered its guidance for rate cuts in 2025 and 2026.

Treasury yields modestly fell by a few basis points and the curve flattened by a small amount.  As a result, longer duration strategies outperformed their shorter-dated counterparts.  Long-term Treasuries increased 1.2% and outperformed the 0.7% return of intermediate-term Treasuries and the 0.5% gain in Treasury bills.  In aggregate, the Treasury market rose 0.6%.

Credit spreads narrowed with high yield falling 13 bps and investment-grade corporates declining 6 bps.  Securitized markets—both agency mortgage-backed securities (MBS) and areas of credit like commercial MBS (CMBS) and asset backed securities (ABS)—experienced tighter spreads as well.

High yield corporates returned 1.2% and investment grade rose 1.3%.  Within securitized, the longer duration of agency MBS helped it rise 1.1%, outperforming the 0.9% gain in CMBS and the 0.5% rise in ABS.

Real Assets

Real asset categories were generally positive in March, with natural resource equities (+10.5%) leading the way on increased oil prices.  Brent crude reached $87/barrel by month-end, up 6.2%.  The price increase was driven by resilient demand as well as continued production cuts from OPEC, tightening U.S. sanctions on Russian oil exports, recent Ukrainian drone strikes on Russian refineries, and continued Houthi attacks on shipping vessels in the Red Sea.

Increased manufacturing activity in China also led to expectations of greater oil demand in the coming months.

Global REITs gained 3.4% on the month. European REITs (+8.4%) and UK REITs (+7.8%) outperformed with expectations that the European Central Bank and Bank of England (BOE) could begin to lower rates ahead of the Fed.  U.S. REITs (+1.9%) ticked higher on stabile yields and expectations for rate cuts in 2024.

A resilient economy and consumer were positives for space demand, with regional malls (+6.8%) and apartments (+6.1%) offsetting losses in data centers (−5.0%) and industrial REITs (−0.5%).

Commodities (+3.3%) were buoyed by increased gold prices (+8.4%), which reached an all-time
high on elevated geopolitical risks, expected rate cuts, and significant central bank purchases. Precious metal commodities, which consists primarily of gold, increased 8.6%. ⬛

 

LOOKING AHEAD APRIL • Achieving a soft-landing is not guaranteed as workers are less enthusiastic about job prospects and layoffs have increased. • The last three inflation reports have exceeded expectations, raising questions about the timing and magnitude of the easing cycle. • The Fed’s “higher for longer” playbook could have an impact on currency markets as the ECB and BOE may be forced to ease to support weakening economies. • AI continues to be a major theme driving equity markets; however, some cracks are forming among the “Magnificent 7.” • Default rates remain benign but distressed exchanges are rising, particularly in the leveraged loan market. Credit spreads are below average and may not offer enough compensation if the credit cycle turns.

 

 

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