Year in Review – 12 Months Ending 3/31/2024

April 17, 2024

Year in Review – 12 Months Ending 3/31/2024

Energy and food price inflation moderated during 2023, helping to drive down headline inflation readings significantly. By the end of this twelve month period, inflation had stabilized at just over 3%. Expectations of an imminent recession were not realized; in fact, economic growth was quite strong. Instead of the oft-predicted “Soft Landing”, the American economy in fact delivered “No Landing”.  For better or worse, predictions around Federal Reserve actions drove much of the activity in the financial markets. Despite a hiccup during the 3rd quarter of 2023, stocks staged a significant rally, particularly late in 2023 and into 2024 as the markets began to anticipate rate cuts in 2024. AI mania captured the imagination of society and the markets.  Surprisingly, regional wars and the collapse of several mid-sized American banks had no long-term impact.

Major Economic Events

The post-pandemic global economic recovery decelerated. Most central banks tightened policy and that depressed economic activity a bit. Although top-line growth in the US was robust, Europe and Japan flirted with recession. The German economy has become very reliant on exports to China, and thus stagnated as demand there was lackluster. China’s abandonment of its zero-covid policy failed to generate significant momentum.

Employment worldwide was strong, and wages rose. Even as the supply chain snafus slowly resolved themselves, spending on services such as travel soared, providing additional inflationary impetus. The Federal Reserve and European central banks maintained relatively high rates. Commodity price pressures eased, which, in concert with the impact of higher interest rates, had the effect of cooling inflation. So-called “core inflation” (overall inflation excluding food and energy) remained uncomfortably high.

The Equity Markets

After being pummeled for most of 2022, stocks embarked on a rally that began late that year. The surge continued into 2023 and 2024, and despite the occasional and inevitable pauses, equity markets ended with significant gains. Technology stocks were the standouts, as investor exuberance over the potential of artificial intelligence combined with what was already a favorable regulatory/competitive environment. Generally strong results combined with plenty of hype around the "Magnificent 7" produced most of the stock market's gains. Among market sectors, only utility stocks dropped. Health care stocks struggled a bit as government initiatives threaten to dent pharmaceutical firms’ profitability. The more economically sensitive parts of the market – small and midcap stocks –ended the period with gains below those of the technology-heavy S&P 500.

International stocks recorded gains, but lacking in tech standouts, lagged the US. Emerging markets struggled. China, which comprises roughly one-third of the emerging market index, fared poorly. Erratic leadership policies including a government assault on its home-grown technology firms as well as a crackdown on property firms - took a toll on Chinese equities. Any signs of relief from these restrictive policies have been greeted with relief from investors, although the capricious nature of Chinese authorities continues to be a threat, as does the economic hostilities between the US and China. China’s attempts to present a welcoming attitude towards investment and dynamism have been thwarted by heavy-handed government actions.

REITs prices recovered as investors began to anticipate Fed cuts in 2024. A powerful  rally late in 2023 was more than enough to wipe out losses from earlier in the year. Although this asset class continues to broaden and includes much more than the traditional office and apartment properties, the rise in work-from-home employment has had a drastic effect on office valuations and this appears to be a structural, rather than cyclical, change. It appears that this asset class has become more dependent on the (predicted) path of Federal Reserve policy than actual economic results.

Natural resource prices rose and fell along with the economic outlook. When recession fears became prominent, oil prices fell. As demand rose and supply was threatened, prices rose. Energy stocks ended the twelve-month period with healthy gains. Alternative energy stocks, although seemingly well-positioned for the long-term, endured a relatively poor period, wounded by lengthened paths to profitability, tightening financial conditions, and continued reliance on fossil fuels.

Overall, the effects of diversification from the traditional S&P 500 index were quite negative. It was all about AI and the Magificent 7 this year and other asset classes were neglected. Small and mid-cap stocks lagged, while international equities were hindered by emerging markets.  Real estate and natural resource gains lagged the broad market.

The Fixed Income Markets

Bond prices continued to exhibit high volatility, falling in each quarter except for a large gain in late 2023. Interest rates rose in August and September, before tumbling down as investors began to sense economic weakness and a likelihood of Fed easing. As always, bond prices move inversely to interest rates, and the 4th quarter rally was enough to lift the overall bond market to a small gain of 1.7%. Inflation decreased and demand for inflation-protected bonds waned. Weakness in foreign currencies resulted in international bonds sustaining small losses.  Cash and similar investments were a safe haven from volatility; by June of 2023 the rate of return from money markets actually exceeded the rate of inflation, the first time that had occurred for many years.