Just as stocks took a big leap into February, they are hopping into the Easter weekend with strong March gains under their belt. Investors’ baskets are full of winners no matter where you look. Egg-celent returns were seen in U.S. large caps – the S&P 500 (SP500, SPX, SPY) rallied more than 3%, while the Russell 2000 ETF (IWM) jumped 4%.
Bonds managed to turn things around over the back half of the month, returning about 1%. Commodities surged more than 4% on the heels of a strong stretch for oil and skyrocketing agricultural and soft commodities. What underperformed?
The Nasdaq 100-Index ETF (QQQ) – the tech-heavy chunk of the market was up less than 2%. Finally, foreign equities enjoyed a more than 3% total return during the final month of the first quarter.
S&P 500 Rises 5 Months In a Row, Fresh All-Time High As the Bull Broadens
Digging into the sector view, Energy (XLE) was leaps and bounds above all the other 10 S&P 500 sectors. The oil and gas niche rose more than 10%. Materials (XLB), another natural resource play, returned 7%. The beaten-down Utilities sector (XLU) finally caught a solid bid as yields retreated – it was up about on par with Materials. All other sectors were positive, though the Consumer Discretionary ETF (XLY) was basically unchanged.
Big picture, investors should be encouraged by the broadening out of the bull market that took off last October. Now a year removed from the regional banking woes of March 2023, cyclicals and value stocks may be taking the torch from once-hot tech and semiconductor equities.
Energy Led the Way in March, Rallies to Near-Decade Highs
Last month, I profiled bitcoin’s meteoric 50% February jolt. This time, gold is in the spotlight. The precious metal settled March at a fresh all-time high, north of the $2200 per ounce mark.
A drop in market interest rates and a tame U.S. dollar were no doubt tailwinds. Price the yellow metal in other currencies, such as the Japanese yen, and the upward thrust appears even more dramatic. Bitcoin will likely recapture attention ahead of the April 20-21 halving event.
Commodities Marching Higher, Agriculture ETF Soars
Turning back to the stock market, the S&P 500 has turned stretched with respect to its forward price-to-earnings multiple. Now near 21x, according to FactSet, it has been about two years since we have seen valuations this pricey.
Different today, however, is that market interest rates are firmly higher compared to early 2022. Fundamental valuation principles assert that higher discount rates should mean lower stock prices. Of course, the tailwinds of AI and a high amount of cash on the sidelines may keep a bid to stocks as liquidity rotates from safe money markets.
SPX Now Near 21x Forward Earnings
Why might money flee the sidelines in due time? Well, at the March FOMC press conference, Chair Powell reiterated that interest rate cuts are on the way so long as inflation data continues its downward path. He admitted that it has been a bumpy road, but the confluence of consumer price data points to tame enough inflation for the policy rate to be reset lower – perhaps as early as June.
As it stands, traders price in three quarter-point eases in 2024. That is a sharp drop from more than six as was expected at the turn of the year. Solid growth trends have changed that outlook, and stocks have fared just fine with the tighter monetary policy conditions expected.
Three Rate Cuts Priced Into 2024
Looking back, February Retail Sales data disappointed investors and helped to bring down market interest rates. It came alongside more concerning inflation data that first began in January.
For a moment, there were fears that the short-term trends would threaten Fed rate cuts, but while inflation had a hiccup, broader growth measures suggest that expansion rates are being held in check.
February Retail Sales Soft, Negative Revisions
We indeed see that in the Atlanta Fed’s Q1 GDPnow model output. The US economy is seen as expanding at a 2.1% annual rate, significantly below the 3.4% rate reported in the previous quarter. In my view, the Goldilocks soft-landing narrative remains alive and well.
In terms of earnings expectations, forecasters now project $244 of S&P 500 operating EPS this year and $276 in 2025, according to FactSet.
Q1 U.S. Real GDP Growth In Check
The Bottom Line
Markets finish the first quarter with a flourish. Stocks big and small, domestic and foreign, rallied while the bond market steadied itself after an early-year stumble. Commodities soared, which puts upward pressure on near-term inflation expectations, while consumer sentiment appears decent heading into Q2. Bitcoin (BTC-USD) remains near $70k just as gold’s rally enters the mainstream.
With interest rate cuts ahead, but stretched stock market valuations, investors will have a lot to digest ahead of the March jobs report on April 6 and the upcoming earnings season.