Equity markets continued their impressive form in March, delivering further gains and rounding out a quite stunning first quarter. Although the loosely defined US Tech sector, particularly those associated with the Artificial Intelligence (A.I.) theme, made the most significant contribution to Q1 returns, in March we saw a broadening of equity market participation. Of note was the resurgent Energy sector which, given its dominance in domestic markets, helped the UK stock exchange to enjoy both absolute and relative success.

Emerging Market equities also achieved some early March success, perhaps on hopes Chinese authorities were looking a little more assertive in their efforts to address a stuttering economy. Momentum reversed mid-month, however, as the Chinese response appeared to fall shy of what markets were hoping for, particularly given the scale of its housing market travails. The major segments of the bond market also carved out positive performance across March, though gains were more modest versus that of equities.

On balance, the dominant theme/headwind for bond markets this year has been the combination of resilient growth and stickier inflation, forcing a reappraisal of both when interest rate cuts will begin, and how many we’ll get before the year concludes. At the start of the year interest rate futures (i.e., ‘the market’) were informing 6 cuts were anticipated from the US Federal Reserve in 2024. As at the end of March this number was more like 3. Interestingly, ‘3 cuts’ now aligns with the Federal Reserve guidance within its official policy communications (the dot plot).

What has taken many market participants by surprise, this quarter, has been the equity market’s ability to ‘shake off’ the hawkish* bond market pivot; with many previously concerned a higher for longer interest rate environment might usher in a more pernicious growth outcome. Whilst such concerns may yet prove prophetic, for now markets are taking comfort from the reason for the hawkish shift, rather than any potential consequences from it. Specifically, encouraging economic performance, driven by a resilient jobs market and robust consumer spending, has likely been a catalyst for a reduction in calls for rate cuts. Rather than balking at this development, however, equity markets appear more keenly focused on the fading prospect of an imminent recession.

Of course, investors have also shown great enthusiasm for the A.I. theme which, to date, has achieved remarkable earnings performance, dwarfing any macro-related influence. Also on a macro theme, however, we would also suggest that whilst markets may have been frustrated by the stickier levels of inflation, the overall trends still point lower, and continue to support a summer initiation of interest rate cuts.

For now, therefore, the ‘Goldilocks’ environment of resilient growth, fading inflationary pressure, and more accommodative monetary policy, remains in place. Indeed, such a backdrop has often been a favourable one for stock markets and encourages the current preference for equities within portfolios (where appropriate). It is important to stress, however, there are non-negligible risks to this view. Whilst there is good reason to believe healing supply chains, housing market weakness and cracks in the labour market can prolong the disinflationary trend, hopes growth can remain positive throughout 2024 and into 2025 may yet unwind.

*Hawks vote for tighter money policy – meaning higher interest rates – with the aim of keeping inflation in check.

Kind regards,

iPensions Wealth Team

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