Quarterly Market Update

2024 was off to a strong start as all major US equity indices reached new highs and economic growth continues to trend near long-term averages.

Hotter than expected January and February inflation continue to support a “higher for longer” interest rate narrative, with only two rate cuts (as of the time of publication) expected for the year, compared to the six priced in as we entered 2024.

Paired with a labor market that remains historically strong, all eyes are on the Federal Reserve, watching for signals of when it is expected to begin cutting rates.

Within equity markets, the “Magnificent Seven” who drove the majority of 2023 market returns have begun to bifurcate. The continued focus on AI advancements spilled over into industries such as semis, cybersecurity and robotics, that are more directly set to benefit from this innovation.

Additional opportunities outside of the technology sector have come into focus as we have seen a broadening out of equity performance across global markets.

This resulted in ten out of eleven US sectors posting positive performance in addition to strong returns seen in international markets such as Europe and Japan.

Fixed income markets were more mixed during the quarter. Credit spreads continue to tighten, and we saw outperformance in lower quality segments. The 10-Year Treasury yield also increased during the quarter, ending at 4.20%.

CWB portfolios saw positive returns in Q1:2024:

• Portfolios with higher levels of equities exposure generated higher returns driven by a broadening out of positive performance across global equities in a risk-on environment.
• Portfolios with higher exposure to growth equities also benefited from continued tailwinds from AI, within industries that both promote AI enablement and will benefit from further development.

Overall, portfolios experienced a strong quarterly return even though hotter than expected inflation prints have shifted the interest rate expectations for the remainder of the year.

What kind of impact did we see to Equities and Fixed Income asset classes?

• Global Equities gained 8.20% while Global Bonds were flat for the quarter.
• US Equities outperformed other regions as the Russell 3000 index climbed 10.0% while US Investment Grade Bonds depreciated by 0.8%.
• Non-US Developed equities gained 5.8% with stronger performance in Europe while Emerging Markets equities returned 2.4%. Japan was the strongest performing country while China Equities declined by 2.2% weighing on overall returns.
• In the US, growth equities outperformed value equities, supported by strong earnings growth expectations. In a reversal of last quarter’s performance, large cap outperformed small cap.

After three months of hotter than expected inflation prints, the narrative has shifted from when we will expect to see rate cuts in 2024, to if we can expect to see rate cuts. After easing inflation figures were seen at the end of 2023, January through March data surprised to the upside and raised the question, how sticky will these higher inflation levels be?

Federal Reserve Chairman Powell’s most recent comments have also shifted from a dovish tone to one that emphasizes that the committee needs to see stronger signs in improving inflation before considering a rate cut. Pairing Powell’s comments with continued low unemployment, has moved expected rate cuts to just two in 2024.

A broadening out of equity performance, outside of the Magnificent Seven, is expected to continue. Small and mid-cap equities offer an attractive valuation opportunity, trading at historically low multiples and much more attractively priced relative to large cap.

In Fixed Income, hotter inflation data has sent yields higher relative to year end, and we expect continued volatility surrounding upcoming economic reporting and any signals of changing sentiment.

While the US continues to hum along and report robust economic figures, the lingering question continues to be if the Federal Reserve’s interest rate decisions can result in a soft landing or if there should be concern for potential slowdown.

As we look at potential risks for 2024, geopolitical and election risks are the first that come to mind. With two wars raging and major elections on every continent, history has shown that in periods when events merely cause fear but don’t deliver a catastrophe, staying invested in a diversified portfolio while taking advantage of dislocations has been most beneficial.