Economic Update: A Review of First Quarter 2024

The U.S. economy continues to hold up much better than many expected it would. U.S. GDP growth finished at a 3.2% annualized pace in fourth quarter 2023 while the Atlanta Fed’s GDPNow model currently projects a similar 2.8% growth for first quarter 2024. If that projection holds true, it will represent the seventh consecutive quarter of at least 2% growth. Inflation also continues to slow, albeit it gradually, toward the Fed’s 2% target while jobs growth remains relatively strong.

While a recession is still not completely off the table, it appears the Fed has managed to engineer a soft landing for the economy despite the significant increase in interest rates over the past few years. The U.S. stock market responded favorably in the first quarter, climbing 10.56% including reinvestment of dividends during the period. The S&P 500 index hit a record high on Jan. 24 and has subsequently reached record highs multiple times since then.

U.S. Economy

The current Fed rate range still sits at 5.25% – 5.5%. The Fed currently expects that range to decrease to 4.5% – 4.75% by the end of 2024 for a total of three cuts during the year. At this point, they are also anticipating three additional cuts during 2025. However, the most recent Fed minutes show that the committee may do less than that depending on economic data, so it would not be a surprise to see them go a little slower than official projection. Note that the Fed’s current prediction for the long-term range is 2.5% – 2.75%, so rate cuts are likely inevitable at some point; it is just a matter of how quickly they arrive.

After peaking at 9.1% year over year in June 2022, inflation has been on a choppy but downward trend since then. The most recent trailing 12-month reading as of February was 3.2%. Note, however, that this number seems to have plateaued in the last few months. So, while we are getting close to the Fed’s long-term target rate of 2%, it may take some time before we get all the way there.

The jobs market is still strong. Despite a recent boom in immigration, the unemployment rate has been at or below 4% since December 2022, which is the longest stretch since the late 1960s. According to the Bureau of Labor Statistics, Immigration Services approved more than 2 million applicants for employment authorization during 2023, a record number of approvals that represents a 70% increase from 2022.

Within the U.S. stock market, concentration of performance has been a bit of a concern. The Magnificent 7 (Nvidia, Meta, Amazon, Microsoft, Alphabet, Apple and Tesla) rose an average of 112% during 2023, driving much of the S&P’s total performance. In contrast, market gains during the first three months of 2024 have been broader, which may be a bullish sign. All the S&P 500 individual sectors are positive, with the exception of real estate.

Yet despite good recent economic data and a surging stock market, consumer sentiment is still relatively pessimistic. The latest University of Michigan Consumer Sentiment reading remains uptrend — registering 79.4 in February — but it still represents a fairly low reading by historical standards as it is well below the 100 level normalized in December 1964.

International Economy

The war in Ukraine, weaker consumer consumption and pessimistic business expectations continue to be a drag on the European economy. Composite PMI surveys, which are a measure of economic health for the manufacturing and services sectors, remain weak. The March reading for the Euro Area registered 49.9. Germany and France came in at 47.4 and 47.7 respectively. Readings below 50 represent a suggestion of future economic contraction.

Unlike the inflationary pressures in other parts of the world, China has been struggling with deflation. This is in large part due to significant declines in property prices, which have caused a decline in overall household wealth. In February, however, inflation turned positive for the first time in six months. But analysts warn that those price gains could be mostly attributable to the Lunar New Year holiday, which fell in February this year as opposed to January during 2023.

Outside Europe and China, the global economic picture looks more promising. In March, the Bank of Japan recently raised interest rates for the first time in 17 years, leading analysts to speculate that their decades-long slump may finally be nearing its end. Japan was the last country in the world to maintain negative interest rates.

Other Asian markets are experiencing positive secular trends, including AI-related semiconductor manufacturing. For instance, India projects its GDP to grow by 7.6% in the next 12 months. The composite PMI survey reading for India in March was 61.3, which strongly suggests continued future expansion.

Markets

Equity markets flourished during the first three months of the year. U.S. large-cap equities, as represented by the S&P 500 Index, gained 10.56% during the quarter. Developed international equity markets, as represented by the MSCI EAFE Index, were up 5.78% for the quarter. The MSCI Emerging Markets Index also posted gains, but not as significant as developed markets. That index finished the quarter with a 2.37% total return.

Bond indexes did not perform well due to the Fed’s guidance concerning future rate cuts. The Barclays U.S. Aggregate Bond Index was down 0.78% during the first quarter. The Barclays Global Aggregate Bond Index was up, but only a scant 0.01%. The Barclays U.S. Inflation-Linked Bond Index was down 0.08% during the period.

Commodities fared better due to inflation, coming in slightly higher than originally hoped. The Dow Jones UBS Commodity Index gained 2.19% during the first three months of the year.

Outlook

Despite facing challenges during 2023, the U.S. economy defied widespread predictions of recession. Business spending has benefited from a flurry of activity in the pursuit of artificial intelligence capabilities. That combined with inflation moderation and jobs growth have kept consumers spending, our economy growing and our markets bullish. That bullish sentiment has persisted during the first three months of 2024.

Note, however, that investor sentiment can change very quickly. While overall revolving credit as a share of disposable income is not particularly concerning yet, there has been a recent pickup in auto and credit card loan delinquencies. Both have now risen above pre-pandemic levels. With the current relatively high interest rates, that could lead to an uptick in overall bankruptcy filings in the near future. Potential student loan delinquencies could pose a problem down the road as well.

Overall, the health of our economy looks good, but much of that positive sentiment has already been reflected through the strong market performance in 2023 and the first part of 2024. Further growth from this point will depend on continued economic gains. As always, we recommend a diversified portfolio containing a reasonable amount of equity exposure for any investor with a long enough time horizon.

Bloomberg US Aggregate Bond Index: The Aggregate Bond Index is a broad-based benchmark that measures the investment grade, dollar-denominated, fixed-rate taxable-bond market including Treasuries and government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS. The Aggregate rolls up into other Bloomberg flagship indices such as the multi-currency Global Aggregate Index and the Universal Index, which includes high-yield and emerging markets debt. The Aggregate Index was created in 1986, with index history backfilled to Jan. 1, 1976.

Bloomberg Global Aggregate Bond Index: The Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the Aggregate (USD 300mn), the Pan-European Aggregate (EUR 300 million) and the Asian-Pacific Aggregate Index (JPY 35 billion). In addition to securities from these three benchmarks (94% of the overall Global Aggregate market value as of Dec. 31, 2010), the Global Aggregate Index includes Global Treasury, Eurodollar (USD 300 million), Euro-Yen (JPY 25 billion), Canadian (USD 300 million equivalent) and Investment Grade 144A (USD 300 million) index-eligible securities not already in the three regional aggregate indices. The Global Aggregate Index family includes a wide range of standard and customized sub-indices by liquidity constraint, sector, quality and maturity. A component of the Multiverse Index, the Global Aggregate Index was created in 1999, with index history backfilled to Jan. 1, 1990.

Bloomberg Global Inflation-Linked Index: The Global Inflation-Linked Index (Series-L) includes securities that offer the potential for protection against inflation as their cash flows are linked to an underlying inflation index. All securities included in the index must be issued by an investment-grade-rated sovereign in its local currency. The list of eligible currencies is the same set of currencies eligible for inclusion in the Global Aggregate Index. The Global Inflation-Linked Index (Series-L) represents a stand-alone multi-currency index exposed to the real yield curve for each relevant currency. As such, the index does not contribute to the Global Aggregate Index. The Global Inflation-Linked Index (Series-L) was created on Oct. 31, 1997.

S&P 500^® Index: This is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard & Poor's chooses the member companies for the 500 based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. The returns presented for the S&P 500 are total returns, including the reinvestment of dividends each month.

SMSCI EAFE Index: The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the U.S. and Canada. As of April 2002, the MSCI EAFE Index consisted of these 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

MSCI Emerging Markets Index: The MSCI EMF (Emerging Markets Free) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of April 2002, the MSCI EMF Index consisted of these 26 emerging-market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.

Bloomberg Commodity Index: As part of the DJ-UBSCI℠ family, the Bloomberg Commodity Index℠ is calculated on an excess-return basis and the Bloomberg Commodity Index Total Return℠ is based on the BSCI℠. The former reflects the return of underlying commodity futures price movements only, while the latter reflects the return on fully collateralized positions in the underlying commodity futures.

Wilshire US REIT Index: Introduced in 1991, the Wilshire REIT index is intended to broadly measure the performance of publicly traded real estate equity securities. The index is market-capitalization weighted of publicly traded real estate securities such as Real Estate Investment Trusts, Real Estate Operating Companies and partnerships. The index is composed of companies whose charters are the equity ownership and operation of commercial real estate.

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