Wall Street was off to a fast start in 2024 as the S&P 500 surged 10% in Q1 - its fastest YTD rise since 2019. This performance was also broad-based, with virtually all major indices hitting new highs. This was fueled by strong corporate earnings, optimism surrounding economic recovery and infrastructure spending plans. However, concerns over inflation, interest rates and geopolitical tensions, particularly with Russia and China, led to increased volatility late in the quarter, and so far, in April. The U.S. economy has shown robust GDP growth, supported by strong consumer spending, business investment and government stimulus. However, supply chain disruptions, labor shortages and inflation pressures may hinder sustained growth. Q2 will likely focus on election campaign rhetoric, renewed inflation concerns, Q1 earnings results and the ongoing turmoil in Ukraine and the Middle East. Investors have been anticipating an interest rate cut by the Fed, but that now looks unlikely. Their monetary policy decisions will be heavily influenced by employment data. Another strong payroll report would likely limit interest rate cuts, perhaps throughout all of 2024.
Inflation: The U.S. is facing persistent inflationary pressures. Supply chain disruptions, rising energy prices, and robust consumer demand are causing higher inflation levels. The extent and duration of these inflationary pressures, along with the Fed’s response, remain uncertain.Interest Rates: The Fed kept its rate at the current range of 5.25%-5.5%. The Ten-Year Treasury rate reversed its 4th quarter downward trend by steadily rising from ending December at 3.9% finishing the 1st quarter at 4.3%. Fed posturing throughout the quarter had led to forecasts of three interest rate reductions throughout the year, although that likelihood remains subject to change based on sticky inflation and continued strong economic data.Housing: Median existing-home price sales were $384,500 in February, up 5.7% from the February 2023 price of $363,600. The 30-year fixed-rate mortgage rate averaged 6.74% in March, up slightly from 6.6% a year ago.
Investor sentiment appears to be looking beyond the Magnificent Seven stocks, whose valuations are expensive. Excluding these seven stocks, the S&P 500 has a P/E ratio of 18.9X, in line with historical averages. Data suggests that a Q2 pullback is more probable than a correction, absent significant macroeconomic shocks. Futures trading also suggests that investors are anticipating election-driven, higher market volatility.
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