For the three-month period ending March 31st, the S&P 500 Total Return Index increased 10.56% while the Bloomberg U.S. Aggregate Intermediate Bond Index decreased 0.42%.
The U.S. economy continued to show great resilience, with corporate earnings, employment, and GDP growth all exceeding expectations. Inflation remained higher than the Fed’s aspirational target rate of 2%, but at a rate substantially below the peak rate that followed the disruptions that the pandemic generated. The rebound in consumer confidence was definitely a highlight for the quarter, as the consumer represents 70% of the economy.
Federal Reserve monetary policy remains in focus for 2024 and key economic data, especially those indicators tied to inflation, will have a significant impact on investor sentiment. The stock market leadership continues to be driven by large company growth stocks; our view is that there will eventually be a rotation to other areas of the market. We forecast that U.S. economic data will remain resilient in the second quarter, with incremental strength in manufacturing, and continued incremental cooling in inflation and the labor market. While we do not see as much upside to GDP estimates from here, we do anticipate another solid season of corporate earnings. We are monitoring the inputs that are creating the stickiness in inflation, specifically the energy markets and housing costs. If the recent surge in geopolitical tensions and the accompanying spike in oil prices persist, then our outlook for economic growth would have to be reduced.
In fixed income, short-term interest rates with yields 2% above the inflation rate offer an attractive return for risk-averse investors, while the inverted yield curve creates price risk on longer dated bonds. A decline in those short-term rates would motivate investors to rotate into other securities, such as dividend paying companies. Additionally, a decline in those short-term borrowing costs would have a significant positive impact on the profitability of many companies.
Previous periods of market volatility have demonstrated that trying to time the market is a difficult and typically underperforming pursuit. For long term investors, simply staying invested is the most prudent investment strategy. In addition, we encourage investors to manage risk by staying in their asset allocation range and maintaining a diversified portfolio.