The stock market continued to climb in the first quarter. Large domestic companies, measured by the Standard & Poor’s 500, gained 10.2% while smaller US companies, measured by the Russell 2000, advanced 4.8%. The Nasdaq Composite, heavily weighted in technology stocks, was up 9.1%. Foreign firms, generally speaking, also climbed with the Dow Jones World Index (ex US) up 3.6%.
Having finished 2023 in strong fashion, investor sentiment was upbeat heading into the new year. A resilient economy, enthusiasm surrounding the prospects for artificial intelligence and the expectation of multiple interest rate cuts all added to a positive environment for stocks. Demand for equities continued throughout the quarter with the S&P 500 notching 22 all-time closing highs. This was actually the best start to a year since 2019.
Unlike much of last year, performance was not as narrowly focused in the mega-cap technology stocks. With the pullbacks in Apple and Tesla, and the uneven performance of Alphabet, the dominance of the “Magnificent Seven” has somewhat faded. While the remaining “Fab Four” did indeed have a significant weighting influence, performance has begun to even out. All but one of the 11 sectors of the S&P 500 have risen, and value indices are showing periods of out-performance. This is a good sign for those making the case for a continued market expansion.
So what do we expect for the rest of the year? Our regular readers know we shy away from making concrete short-term market prognostications. However, having come this far this fast in the first quarter, it would be hard to ignore the logic that the market could use a little breather. We are all familiar with the Wall Street adage, “trees don’t grow to the sky.” Put another way, markets don’t go up in a straight line. A pullback at some point is actually healthy for the market. The more frequently they occur, the less dramatic any individual recalibration needs to be. What might be the catalyst of such a downdraft? One potential suspect would be the old good news is bad news scenario. If economic data continues to surprise on the upside, investors may fret that the Fed will be slow to cut rates, possibly avoiding any cuts at all in 2024. Investor tendencies lean toward selling when the Fed puts fighting inflation ahead of economic expansion and employment.
We continue to recommend long-term investors stay the course with their thoughtfully constructed portfolios. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.