March 2024 Market Lookback

Buoyed by strong economic momentum and Q4 earnings, the S&P 500 finished the month at a new all-time high. Strategists and analysts alike upped expectations for 2024 earnings, while the Federal Reserve reiterated their expectations for three interest rate cuts on the year. Treasury yields finished the month either flat or slightly down, while credit spreads continued to tighten.

Macro

•   The FOMC held the fed funds target rate at a range of 5.25%-5.50%, with the median FOMC official indicating that they expected three rate cuts in 2024.

•   As part of the FOMC’s Summary of Economic Projections, the median member increased their 2024 expectations for growth and inflation, while slightly lowering their unemployment projection.

•   275k nonfarm jobs were added in February, while the prior two months were revised down by 167k.

•   Q4 GDP growth was revised up from a seasonally adjusted annual rate of 3.2% to 3.4%, while GDI came in at 4.6%.

•   While the Conference Board’s Consumer Confidence Index remained flat in March, the Present Situation component rose from 147.6 to 151.0 while the Expectations component fell from 76.3 to 73.8.

•   Personal income rose 0.3% m/m (below consensus of 0.4%), while spending grew 0.8% m/m (above consensus of 0.5%).

Equities

•   The S&P 500 closed the month at an all-time high of 5,254 points.

•   Bottom-up 2024 EPS estimates for the S&P 500 remained flat at $243 in February, while top-down strategist estimates rose from $241 to $244.

•   Value stocks outperformed growth stocks by 3.2 percentage points, the first such outperformance since the end of 2023 and the biggest outperformance since December 2022.

•   Energy stocks beat the broader market for the first time since September 2023.

Fixed Income

•   Longer-term Treasury yields were mostly flat, while shorter-term yields fell 5bps.

•   U.S. investment grade corporations issued $142 billion in bonds in March, bringing the total for the quarter to over $529 billion, the most in a quarter ever.

•   High yield bond spreads finished the month at 346bps, a new low since the Fed began its tightening cycle in early 2022.

Regaining Some Energy

March was another pretty good month for stocks, as the S&P 500 closed at 5,254 points, a record high. That has been a pattern for the index, with over 20 record highs set so far this year. What was different this month was the composition of gainers: The Energy sector notably outperformed other sectors after lagging the broader market in January and February.

Why? Considering that the price of crude oil explains two-thirds of historical moves in energy stocks, an obvious tailwind for the sector is that oil prices rose more than 6% in March. Given the sector’s gain of nearly 11% though, other factors may be at play. Interestingly, oil prices rose more than 9% in the first two months of the year while energy stocks were only up 2%, so perhaps this is just stocks catching up to the commodity.

Beyond that, however, measures such as crack spreads (i.e. oil refining margins) have widened, as have the differences between front-month and back-month oil contract prices (e.g. price of oil this month versus in three months). Measures like this can be interpreted as demand increasing relative to supply, which would be expected to boost energy stocks. These are all possibilities, but often difficult to ascertain.

Full Throttle

The perception of an acceleration in overall demand can be seen beyond the energy sector in broad economic data. Datapoints such as the number of jobs added, inflation, jobless claims, and most housing data have all generally come in hotter than expected. After initially declining from mid-February to mid-March, the Citi Economic Surprise Index has taken a turn higher again. The index is calculated based on both the direction of surprises and their magnitude, and so a turn higher supports the idea of a cyclical acceleration.

With that said, cyclical stocks have done better than their defensive counterparts, which makes sense given the upside data surprises, but there may be a deeper insight to be had. Much like energy stocks rose more than oil prices, cyclicals have outperformed by more than what a quick look at the above chart would suggest they “should” have. Moreover, while the surprise index rolled over for over a month before moving higher, cyclicals’ run of outperformance has gone on mostly unabated, save for a week in mid-March.

It’s possible that the run-up is somewhat overdone and we’re due for a breather. But remember: Markets are supposed to be forward-looking. What might seem like an overreaction could just be stocks pricing in further economic surprises to come. Let’s see where the wind blows in April.

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Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.
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