In the first quarter, despite strong economic data and signals from the Federal Reserve that previously anticipated rate cuts would likely be postponed, U.S. equities continued to rally. Performance was wider in breadth than in previous quarters, with 2 of the “Magnificent 7” stocks suffering notably poor performance, and 7 of the 12 sectors of the S&P 500 returning over 9%. However, large-cap continued to dominate small-cap, with +10% returns for large-cap companies, and small-cap lagging behind in the mid-single digits.
International developed equities and emerging markets (EM) equities posted positive returns for the quarter, albeit falling behind their U.S. counterparts. The MSCI EAFE returned 5.8% for the quarter, while the MSCI EM index returned 2.4% for the quarter. Concerns over China continue to plague the returns of major international indices, with Chinese equities down over 2% for the quarter coupled with a troubled outlook for the country.
Inflation, measured by CPI, increased from 3.3% in December to a year-over-year rate of 3.5% in March. CPI excluding food and energy, generally viewed as sticky inflation or Core CPI, remained relatively unchanged at a year-over-year rate of 3.8%. Indicators used to measure U.S. economic activity such as the ISM Manufacturing and Non-Manufacturing indexes both signaled expansionary economic activity, further complicating the inflation and interest rate outlook for the Fed.
As inflation continued to remain elevated in the first quarter, the Federal Reserve kept rates unchanged at a range between 5.25% - 5.50% at the March FOMC meeting. During the meeting, the Fed communicated that they have not changed their overall view of inflation gradually trending lower. However, Fed Chair Powell acknowledged that inflation had been stickier than anticipated, and as a result believes reaching the 2% inflation target could be a bumpy road.
Investment grade (IG) spreads narrowed from 104 basis points (bps) to 93 bps, and high yield (HY) spreads narrowed from 339 bps to 312 bps over the quarter. Both were well below their long-term median levels [1].
To view the first quarter reports, click on the links below: