Recapping a Stellar First Quarter for Stocks

Additional content provided by Kent Cullinane, Analyst, Research.

With Q1 2024 behind us, we explore top contributors and detractors to performance across various asset classes and sectors. We also compare Q1 performance with our current Strategic and Tactical Asset Allocation Committee (STAAC) positioning.

Starting with the broadest asset classes, global equities, as measured by the MSCI ACWI Index, rose 8.2% in Q1 as inflation continued to abate. Central banks globally pointed to potential interest rate cuts this year, and the possibility of a soft landing continued to boost investor sentiment. In fixed income, the Bloomberg U.S. Aggregate Bond Index finished the first quarter in negative territory, dropping 0.8%, marking the sixth consecutive negative quarter. Although it was another negative quarter for bonds, it appears investors and the Federal Reserve (Fed) may be more aligned in terms of inflation and the number of expected interest rate cuts this year.

Domestic equities, as measured by the S&P 500, added to their strong 2023 returns with a 10.2% first quarter rally, marking its best first quarter since 2019. Not far behind was the technology-heavy Nasdaq Composite’s 9.1% gain, followed by the Dow Jones Industrial Average up 5.6%. Small caps, as measured by the Russell 2000, trailed their large cap peers, rising 5.0% during the quarter. Small caps continue to underperform their large cap counterparts, however, assuming a soft landing (our base-case scenario), low valuations and an improved U.S. economic growth outlook could be tailwinds for this asset class in the future.

Turning to international markets, the MSCI EAFE gained 6.0% in the first quarter, with Japan a sizable contributor for the developed international equity index. Emerging markets (EM) continued to underperform broader developed markets as China, making up nearly a quarter of the EM index, closed the first quarter in negative territory in U.S. dollar terms.

In terms of investment styles, growth stocks continued to outpace their value stock counterparts, as the Russell 1000 Growth Index gained 11.3% compared to 8.9% for the Russell 1000 Value Index. Below is a chart highlighting trailing performance across various equity asset classes.

Strong First Quarter for Domestic Large Cap Growth Stocks

Source: LPL Research, FactSet, 04/01/24
Disclosures: All indexes are unmanaged and can’t be invested in directly. Past performance is no guarantee of future results.

As far as domestic equity sectors are concerned, energy outperformed all other sectors, rising 13.5% during the first quarter, as higher oil prices contributed meaningfully to outperformance. Following energy, communication services, financials, and industrials each rose by double-digits. While no sector finished the quarter in the red, consumer discretionary was the largest detractor from performance, rising 3.1%.

Within bonds, spread sectors such as high-yield corporates and bank loans outperformed their investment-grade peers, gaining 1.5% and 2.5%, respectively. Preferred securities outpaced all other fixed income asset classes, rising 4.5% as the sell-off in the banking sector roughly a year ago provided an attractive opportunity to invest in these senior securities. Overseas, foreign bonds rose a marginal 0.3%, with emerging market bonds contributing to the positive performance, adding 1.5% over that period.

Preferred Securities Delivered Strong First Quarter Returns in a Tough Environment

Source: LPL Research, FactSet, 04/01/24
Disclosures: All indexes are unmanaged and can’t be invested in directly. Past performance is no guarantee of future results.

When comparing the latest LPL Research STAAC views with Q1 2024 performance, there are a number of areas in which LPL’s tactical guidance has benefitted client portfolios. The STAAC maintained an overweight to large cap equities over mid- and small-caps through much of the first quarter, benefiting from mega cap technology leadership. Additionally, the STAAC favored, and still favors domestic equities over foreign, as the U.S. economy continues to outgrow most other developed and emerging markets. Finally, the STAAC favored growth-style equities over value throughout the first quarter, and still does, although the tactical overweight was reduced in mid-March as technology sector momentum began to wane and value stock performance began to improve.