QUARTERLY HIGHLIGHTS

 

US

 

US economic growth remained on solid footing during the first quarter. Increases in real wages and year-over-year downward trends in inflation rates helped the economy overcome tighter credit conditions and a drop in excess savings. However, questions about inflation’s longer-term levels persisted through the quarter. The Institute for Supply Management (ISM) manufacturing PMI increased to 50.3 in March—its first reading above 50.0 since September 2022. US manufacturing activity picked up for the first time in twelve to 18 months as both demand and production rebounded. The survey's measure of prices paid by manufacturers for inputs rose for the third month in a row in February, to 55.8 from 52.5, indicating raw-material prices have been trending upwards as commodity prices remain volatile. The US services sector PMI was also in positive territory, while the survey's measure of prices paid for inputs showed signs of moderation.

Both the New York Fed Survey of Consumer Expectations and The University of Michigan’s consumer sentiment most recent surveys have shown consumer Inflation expectations at around 3%, well ahead of the target of the Federal Reserve (the Fed). The Federal Open Market Committee (FOMC) met in January and March. At both meetings, it agreed to maintain the federal-funds target rate corridor at 5.25-5.50%. The meetings did not feature any notable announcements or changes, and no major changes were made to the Summary of Economic Projections (SEP); however, notably, the median Fed member’s expectation for core inflation in 2024 increased from 2.4% to 2.6%. The FOMC made no changes to its balance-sheet reduction plans ($95 billion per month); however, the Fed confirmed it is nearing a decision around slowing the pace of its balance-sheet run-off. During the quarter, the Fed’s balance sheet fell from $7.8 trillion to $7.5 trillion.

In March, former US Treasury Secretary Steve Mnuchin spearheaded a $1 billion rescue of New York Community Bank. The intervention was driven by challenges within the bank’s commercial real-estate loan portfolio, particularly among its office and affordable housing holdings. The office sector has experienced significant difficulties as post-pandemic work arrangements have reduced demand for office space and created uncertainties around the demand for such properties in the future. Additionally, the bank’s concentration of affordable housing assets in the New York City area suffered from recent regulatory changes that led to a decline in property values.

The impact of these challenges was compounded by the bank’s acquisition of $23 billion of Signature Bank’s loan portfolio last year. The acquisition increased the bank’s size, pushing it into a regulatory category that requires higher reserves. The $1 billion injection aims to strengthen the bank’s key regulatory capital ratio.


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EUROPE

 

Economic data from Europe trended positively over the past quarter, pointing to modest strengthening after a stagnant 2023. Unemployment remains at historically low levels, with the February 2024 seasonally adjusted unemployment rate across Europe and within the European Union at 6.5% and 6.0%, respectively. In addition, the HCOB Eurozone Composite Purchasing Managers Index (PMI), a forward-looking indicator of economic development in Europe, improved from 47.0 as of December 15, 2023, to 50.3 as of April 4, 2024, indicating that respondents are seeing a slight improvement in market conditions overall. Inflation across Europe also continued to decrease, driven by the slower growth of durable goods’ inflation, though services and wage inflation remain at uncomfortable levels (4.0% and above). March 2024 year-over-year headline inflation is estimated at 2.4%, with core inflation higher at 2.9%, driven by a significant reduction in natural gas prices over the past year, leading to energy-price deflation.

The European Central Bank’s (ECB) most recent forward-looking projections expect real GDP growth to remain subdued through early 2024 amid waning tailwinds and tightening financing conditions before strengthening thereafter. With inflation approaching the ECB’s target of 2%, the bank has been more open to the prospect of scaling back monetary policy. ECB President Christine Lagarde indicated as much following the bank’s most recent meeting, stating “if [inflation data] reveals a sufficient degree of alignment between the path of underlying inflation and our projections…we will be able to move into the dialing back phase of our policy cycle and make policy less restrictive.”

 
CHINA

 

China's economy has struggled to regain its pre-COVID momentum, as a protracted property downturn, mounting local government debts, and weak private-sector spending have slowed the pace of growth. In the first two months of 2024, China experienced a 7.1% year-on-year surge in exports—outpacing the modest 2.3% seen last December—from expanded demand in emerging markets (e.g., India and Latin America), a resurgence in exports to the US (in spite of dips in exports to the EU, Japan, and Australia), and a sharp 22% increase in the volume of vehicle exports. Meanwhile, the Chinese Lunar New Year holiday period saw a record rise in travel and consumption, although tourism-related spending continued to lag pre-COVID levels. January and February's retail sales exceeded forecasts, but the consumer price index revealed a complex picture; while costs for clothing and housing grew, prices fell significantly across food, tobacco, and alcohol, suggesting that consumer spending is still in a state of cautious recovery.

On February 20, 2024, the People’s Bank of China (PBOC) reduced its benchmark mortgage rate—the five-year Loan Prime Rate (LPR)—by 0.25% to support the struggling real-estate sector. Despite the cut, the continued downturn in housing sales indicates that the move's impact may be limited; regulators have also implemented additional initiatives, including relaxing purchasing restrictions and providing financing to developers. Beyond interest rates, China's real-estate issues seem mired in broader systemic challenges, including substantial debt burdens and diminished consumer confidence.

US Treasury Secretary Janet Yellen’s visit to China in 2024 concluded with no major breakthroughs, yet US-China relations seem more stable today compared to the turbulent period last year. Both nations agreed to hold more discussions to address rising friction over trade, investment, and national security issues. Nevertheless, major differences and competition between the two superpowers remain, with anticipated ongoing tension in domains such as semiconductor access, Taiwan, and the South China Sea.

 
JAPAN

 

Japan’s fourth-quarter 2023 GDP growth came in at +0.1% (quarter-over-quarter), driven by strong capital expenditure spending growth of 2.1%, which overcame weak private consumption. Core inflation readings remain above the 2% target of the Bank of Japan (BOJ), with year-over-year inflation at 2.8% through February 2024. Japanese equity markets continued to climb on positive fundamentals, including record earnings in the manufacturing sector propelling the Nikkei past the 40,000-yen level, a milestone last reached during Japan’s late-80s economic boom. Most notably, in March, the BOJ hiked rates for the first time in 17 years, from -0.1% to a range of 0.0%-0.1%. The bank’s shift included abandoning its yield curve control (YCC) policy and ceasing its ETF purchase program.

This year’s shunto wage negotiations ended with Japan’s largest companies agreeing to raise salaries by 5.28% in March, the biggest hike in more than three decades. BOJ Governor Kazuo Ueda has repeatedly noted that the outcome of these negotiations will influence the bank’s decision on rates. This—combined with favorable core inflation readings—gave policy makers enough confidence in Japan’s macroeconomic development trends to change course. However, these policy makers remain cautious about the future pace and path of tightening and will continue to buy government bonds at a pace of $6 trillion yen per month.

Increased tourist and travel demand alongside rising profits from price hikes buoyed optimism in Japan's services sector, which climbed to a 33-year high according to BOJ’s Tankan survey. Business sentiment was positive as well, although it trended slightly lower in the first quarter of 2024 (+11) relative to the fourth quarter of 2024 (+13) as measured by the BOJ’s Tankan Index of sentiment. This was primarily driven by lower confidence among motor vehicle, nonferrous metals, and business-oriented manufacturers, while confidence increased among oil & coal, food & beverage, and shipbuilding & heavy machinery manufacturers.

 
COMMODITIES

 

The S&P Goldman Sachs Commodity Index (SPGSCI) ended the quarter up with a total return of 10.36%, driven by robust growth (and positive performance) across all components of the index. Energy (15.71%, S&P GSCI Energy—SPGSEN) and livestock (10.54%, S&P Livestock—SPGSLV) were the best performing constituents, while agriculture (S&P GSCI Agriculture; SPGSAG) and industrial metals (S&P GSCI Industrial Metals; SPGSIM) both achieved modest gains (relative to other commodities) of 0.86% and 0.25%, respectively. Within energy, only natural gas experienced a sharp price decline; all other sub-sectors achieved strong price growth. Within agriculture—due to strong demand and supply shortages in West Africa (where more than half of the world’s cocoa beans are harvested), the price of cocoa rose higher during the quarter. Across industrial metals, prices for copper, lead, and nickel were modestly higher than that of zinc and aluminum, whose prices fell in the quarter. Gold and silver prices also rose in Q1 2024.

Following a slow start to the year, the digital-assets market took off in February and March, resulting in one of the strongest performing quarters in recent history. The premier digital token, Bitcoin (BTC) was up 68.8% in Q1 2024, while the second-most-popular digital token, Ethereum (ETH), was also up 59.9%. Bitcoin reached a new all-time high on March 14, 2024, at $73.8k for the price of one BTC. These returns were supported by strong macro tailwinds and high investor demand, following the approval and subsequent launch of eleven physically backed Bitcoin exchange traded funds in the United States on January 11, 2024.

US:
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The recession forecasted by economists in late 2022 failed to materialize in 2023, as the US economy, carried by a resilient consumer sector, overcame a remarkable number of macroeconomic headwinds.  The US ended the year in the remarkable position of having sustained economic growth, downward trends in inflation, higher interest rates, and steady unemployment. Buoyed by expectations that interest-rate cuts may be imminent, markets ended the year just short of the record highs set in early 2022.  Meanwhile, optimism over economic factors and labor supported gains in consumer confidence across all groups.  Forward-looking measures of business activity were more middling, with the ISM Services Purchasing Managers' Index (PMI) remaining in expansionary territory but down from earlier in the year, and manufacturing PMIs still in contractionary territory but showing signs of improvement with an uptick in production and employment. Following a difficult internal struggle to elect a new speaker of the house, the US House of Representatives passed another short-term spending bill averting a government shutdown; this was quickly approved by the Senate and signed into law. The stopgap spending bill extends funding for military construction, veterans’ benefits, transportation, housing, urban development, agriculture, the Food and Drug Administration, and energy and water programs through January 19, while remaining silent on contentious spending cuts and border-security measures sought by some Republicans.
 
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The Federal Open Market Committee (FOMC) met in November and December.  At both meetings, it agreed to maintain the federal-funds target rate corridor at 5.25-5.50%.  At the December meeting, the Summary of Economic Projections (SEP) was updated: the most noteworthy change was that Federal Reserve (Fed) officials decreased the median projection for the federal-funds target rate at the end of 2024 from 5.1% to 4.6%.  The FOMC made no changes to its balance-sheet reduction plans ($95 billion per month), but the minutes of the December meeting indicated that the FOMC is soon likely to “begin to discuss the technical factors that would guide a decision to slow the pace of (balance-sheet) runoff”; the Fed’s balance sheet fell from $8.1 trillion to $7.8 trillion to close out 2023.
 
Among the sectors of the economy most sensitive to rates, the spotlight remains on commercial real estate, as higher interest rates continue to present challenges for commercial real-estate debt reaching maturity.  Across all sectors, data-provider Trepp estimates that a total of $550 billion of commercial real-estate loans will come due in 2024, followed by $530 billion in 2025.  The extent to which lenders will continue to work with borrowers remains in focus, as borrowers faced with rolling debt face higher debt-service costs upon refinancing.  The office sector continues to draw attention, as office delinquencies remain in the headlines.  According to Trepp, the CMBS office delinquency rate surged from 1.58% in December 2022 to 5.82% in December 2023.  Refinancing office properties continues to prove markedly challenging as lenders continue to exercise caution in this sector. 
 
Meanwhile, the residential housing market has maintained its strength despite higher interest rates.  Driven by a scarcity of inventory, the S&P CoreLogic Case-Shiller Housing Price Index achieved a record high in October 2023.  In December 2023, Fannie Mae’s Home Purchase Sentiment Index reached its highest level since April 2022, driven by softening interest-rate expectations.
 
EUROPE:

According to data from Eurostat, economic growth across the Eurozone declined (-0.1% quarter over quarter) in the third quarter, as the region faced headwinds from inflation, rising interest rates, and tightened fiscal policies.  Among the larger economies, France, Spain, and Belgium experienced growth while Germany contracted from persistent inflation, high energy prices, and weak foreign demand.  Forward-looking economic indicators weakened for the region; the HCOB's final Composite PMI came in at 47.0.  Manufacturing activity continued to contract and demand for services declined as consumers pulled back on spending.  However, there was some signs of improvement in the manufacturing sub-indices tied to new orders and purchasing activity.  Additionally, Eurozone unemployment remained at a record low of 6.4%; employment increased in both services and construction, offsetting weakness in the manufacturing sector. Overall, job vacancy rates have come down from their peaks but remain relatively high by historical standards.

After declining for much of the past year, the rate of inflation across the Eurozone rose to 2.9% in December. The uptick in inflation was primarily due to technical factors, as the impact of base effects and the timing of government subsidies overwhelmed slower price growth for other goods. (Note, core inflation, which doesn’t include energy, food, alcohol, and tobacco prices, ended the year at 3.4%, down from its 2022 peak.) In its last meeting of the year, the European Central Bank (ECB) reaffirmed its benchmark interest-rate policy and announced plans to phase out the last of its COVID-19 era bond-buying programs. The ECB also changed its language around inflation—from describing it as “expected to remain too high for too long,” to saying that it will “decline gradually over the course of next year.”  In her statements following the meeting, ECB President Christine Lagarde assumed a more measured tone and argued against calls for imminent cuts to interest rates, stating that it’s too early to “lower our guard” and that the bank is “data dependent, not time dependent.”

 
CHINA:

China’s economic data in Q4 2023 presented a mixed picture.  Industrial output experienced a significant rebound, growing by 4.6% (year on year) in October and an impressive 6.6% in November.  This growth—the fastest pace since February 2022—underscored the sector’s recovery and contribution to the economy.  On the other hand, already affected by a downturn in the property sector, reduced land sale revenue, and a slowdown in export manufacturing, consumer spending was further impacted by household deleveraging.  Credit cards and mortgage loans saw a decline, indicating caution among consumers.  Overall spending remained below pre-COVID levels, suggesting a slow and gradual path towards recovery.

In response to the property market's challenges, the Chinese government rolled out several initiatives, including reducing down-payment thresholds and mortgage interest rates, and easing restrictions on second-home purchases.  Such measures were designed to ease financial pressure on homebuyers and stimulate market activity.  Another notable development was the provision of low-cost financing, amounting to CN¥1 trillion, for urban village renovations and affordable housing projects.  This significant investment is intended to support the real-estate sector, a critical component of China's economy.  Early indications suggest a positive reception from homebuyers, particularly in major cities, signaling a potential upturn in the real-estate market.

The November 2023 meeting between Chinese President Xi Jinping and US President Joe Biden was a landmark event.  Key topics included curbing illicit fentanyl production and military cooperation, alongside a dialogue on artificial intelligence emphasizing the importance of managing risks and safety issues.  Described as ‘constructive and productive,’ the meeting underlined both leaders' desire for peaceful coexistence and the necessity of avoiding miscommunication.  While it did not resolve all critical geopolitical issues, the meeting was viewed as a positive step towards stabilizing US-China relations.  The meeting's conciliatory tone and focus on cooperation in specific areas signaled a potential easing of the strained relations between the two nations.

 

JAPAN:

Japan’s economy contracted at an annualized growth rate of 2.9% in the third quarter, as a decline in private consumption, which makes up more than half the economy, weighed on economic growth. Although nominal salaries rose year over year, higher prices and inflation wiped out the wage growth in real terms, negatively impacting consumers' purchasing power. In November, Prime Minister Fumio Kishida’s administration announced a new economic stimulus package (approximately $113 billion), aimed at helping households with rising costs. The packages included cuts to income and residential taxes, direct benefits to low earners, extended fuel and electricity subsidies, and funds to support the semiconductor sector.

Japanese business sentiment continued to improve during the quarter as measured by the Tankan survey.  Results were especially strong among large manufactures; automakers' moods brightened as the industry benefited from a weak yen and an easing of supply constraints.  Non-manufacturing sentiment was positive as well, improving for the seventh straight quarter; recovering inbound tourism gave a significant boost to non-manufacturers.  Year to date through November, foreign visitors to Japan topped 20 million for the first time since 2019.

December data showed consumer core inflation trending downwards.  Energy and fuel prices declined due to a combination of government subsidies and base effects.  However, services inflation persists, driven primarily by demand for accommodations and food.  The Bank of Japan (BOJ) ended the year with its low-interest polices in place.  In his statement following the BOJ’s December meeting, Governor Kazuo Ueda cooled speculation about future rate hikes, stressing that more data is needed to confirm a positive wage-inflation cycle and the uncertainty surrounding inflation’s sustainability.

 

COMMODITIES:

The S&P Goldman Sachs Commodity Index (SPGSCI) ended the quarter down with a total return of 10.73%, driven mainly by price gains for industrial metals and precious metals failing to offset weaker prices for energy, agriculture, and livestock.  Contrary to Q3 2023, energy (16.74%; S&P GSCI Energy—SPGSEN) underperformed all other SPGSCI sub-index constituents, with sharply lower prices for crude oil, natural gas, and gas oil.  These detractors to performance occurred despite output cuts from OPEC+. Agriculture (0.73%; S&P GSCI Agriculture—SPGSAG) ended the quarter with higher prices for soybeans, coffee, wheat, and cocoa failing to offset considerable price declines for sugar, corn, cotton, and Kansas wheat.  The precious metals segment outperformed all other commodity constituents during the quarter (10.99%; S&P GSCI Precious Metals—SPGSPM), as both gold and silver achieved robust price gains during Q4 2023.  The industrial metals segment realized a modest gain during the quarter (0.82%; S&P GSCI Industrial Metals—SPGSIM), as prices for aluminum, copper, and zinc offset weaker prices for nickel and lead.   

Following a relatively quiet period in Q2/Q3 2023, the digital-assets market performed well during Q4.  The premier digital token, Bitcoin, was up 57% in Q4 2023, while the second most-popular digital token, Ethereum (ETH), was up 37%, bringing the yearly returns to 155% and 91%, respectively.  Speculation over the approval by the Securities and Exchange Commission (SEC) of a US spot Bitcoin exchange-traded fund (ETF) was a significant driver of price movements during the period; this was subsequently approved in January 2024.

 

UnderConstruction_shutterstock_415850113 [Converted]
EUROPE

According to data from Eurostat, economic growth across the Eurozone declined (-0.1% quarter over quarter) in the third quarter, as the region faced headwinds from inflation, rising interest rates, and tightened fiscal policies.  Among the larger economies, France, Spain, and Belgium experienced growth while Germany contracted from persistent inflation, high energy prices, and weak foreign demand.  Forward-looking economic indicators weakened for the region; the HCOB's final Composite PMI came in at 47.0.  Manufacturing activity continued to contract and demand for services declined as consumers pulled back on spending.  However, there was some signs of improvement in the manufacturing sub-indices tied to new orders and purchasing activity.  Additionally, Eurozone unemployment remained at a record low of 6.4%; employment increased in both services and construction, offsetting weakness in the manufacturing sector. Overall, job vacancy rates have come down from their peaks but remain relatively high by historical standards.

After declining for much of the past year, the rate of inflation across the Eurozone rose to 2.9% in December. The uptick in inflation was primarily due to technical factors, as the impact of base effects and the timing of government subsidies overwhelmed slower price growth for other goods. (Note, core inflation, which doesn’t include energy, food, alcohol, and tobacco prices, ended the year at 3.4%, down from its 2022 peak.) In its last meeting of the year, the European Central Bank (ECB) reaffirmed its benchmark interest-rate policy and announced plans to phase out the last of its COVID-19 era bond-buying programs. The ECB also changed its language around inflation—from describing it as “expected to remain too high for too long,” to saying that it will “decline gradually over the course of next year.”  In her statements following the meeting, ECB President Christine Lagarde assumed a more measured tone and argued against calls for imminent cuts to interest rates, stating that it’s too early to “lower our guard” and that the bank is “data dependent, not time dependent.”

UnderConstruction_shutterstock_415850113 [Converted]
CHINA

China’s economic data in Q4 2023 presented a mixed picture.  Industrial output experienced a significant rebound, growing by 4.6% (year on year) in October and an impressive 6.6% in November.  This growth—the fastest pace since February 2022—underscored the sector’s recovery and contribution to the economy.  On the other hand, already affected by a downturn in the property sector, reduced land sale revenue, and a slowdown in export manufacturing, consumer spending was further impacted by household deleveraging.  Credit cards and mortgage loans saw a decline, indicating caution among consumers.  Overall spending remained below pre-COVID levels, suggesting a slow and gradual path towards recovery.

In response to the property market's challenges, the Chinese government rolled out several initiatives, including reducing down-payment thresholds and mortgage interest rates, and easing restrictions on second-home purchases.  Such measures were designed to ease financial pressure on homebuyers and stimulate market activity.  Another notable development was the provision of low-cost financing, amounting to CN¥1 trillion, for urban village renovations and affordable housing projects.  This significant investment is intended to support the real-estate sector, a critical component of China's economy.  Early indications suggest a positive reception from homebuyers, particularly in major cities, signaling a potential upturn in the real-estate market.

The November 2023 meeting between Chinese President Xi Jinping and US President Joe Biden was a landmark event.  Key topics included curbing illicit fentanyl production and military cooperation, alongside a dialogue on artificial intelligence emphasizing the importance of managing risks and safety issues.  Described as ‘constructive and productive,’ the meeting underlined both leaders' desire for peaceful coexistence and the necessity of avoiding miscommunication.  While it did not resolve all critical geopolitical issues, the meeting was viewed as a positive step towards stabilizing US-China relations.  The meeting's conciliatory tone and focus on cooperation in specific areas signaled a potential easing of the strained relations between the two nations.

UnderConstruction_shutterstock_415850113 [Converted]
JAPAN

Japan’s economy contracted at an annualized growth rate of 2.9% in the third quarter, as a decline in private consumption, which makes up more than half the economy, weighed on economic growth. Although nominal salaries rose year over year, higher prices and inflation wiped out the wage growth in real terms, negatively impacting consumers' purchasing power. In November, Prime Minister Fumio Kishida’s administration announced a new economic stimulus package (approximately $113 billion), aimed at helping households with rising costs. The packages included cuts to income and residential taxes, direct benefits to low earners, extended fuel and electricity subsidies, and funds to support the semiconductor sector.

Japanese business sentiment continued to improve during the quarter as measured by the Tankan survey.  Results were especially strong among large manufactures; automakers' moods brightened as the industry benefited from a weak yen and an easing of supply constraints.  Non-manufacturing sentiment was positive as well, improving for the seventh straight quarter; recovering inbound tourism gave a significant boost to non-manufacturers.  Year to date through November, foreign visitors to Japan topped 20 million for the first time since 2019.

December data showed consumer core inflation trending downwards.  Energy and fuel prices declined due to a combination of government subsidies and base effects.  However, services inflation persists, driven primarily by demand for accommodations and food.  The Bank of Japan (BOJ) ended the year with its low-interest polices in place.  In his statement following the BOJ’s December meeting, Governor Kazuo Ueda cooled speculation about future rate hikes, stressing that more data is needed to confirm a positive wage-inflation cycle and the uncertainty surrounding inflation’s sustainability.

UnderConstruction_shutterstock_415850113 [Converted]
COMMODITIES

The S&P Goldman Sachs Commodity Index (SPGSCI) ended the quarter down with a total return of 10.73%, driven mainly by price gains for industrial metals and precious metals failing to offset weaker prices for energy, agriculture, and livestock.  Contrary to Q3 2023, energy (16.74%; S&P GSCI Energy—SPGSEN) underperformed all other SPGSCI sub-index constituents, with sharply lower prices for crude oil, natural gas, and gas oil.  These detractors to performance occurred despite output cuts from OPEC+. Agriculture (0.73%; S&P GSCI Agriculture—SPGSAG) ended the quarter with higher prices for soybeans, coffee, wheat, and cocoa failing to offset considerable price declines for sugar, corn, cotton, and Kansas wheat.  The precious metals segment outperformed all other commodity constituents during the quarter (10.99%; S&P GSCI Precious Metals—SPGSPM), as both gold and silver achieved robust price gains during Q4 2023.  The industrial metals segment realized a modest gain during the quarter (0.82%; S&P GSCI Industrial Metals—SPGSIM), as prices for aluminum, copper, and zinc offset weaker prices for nickel and lead.   

Following a relatively quiet period in Q2/Q3 2023, the digital-assets market performed well during Q4.  The premier digital token, Bitcoin, was up 57% in Q4 2023, while the second most-popular digital token, Ethereum (ETH), was up 37%, bringing the yearly returns to 155% and 91%, respectively.  Speculation over the approval by the Securities and Exchange Commission (SEC) of a US spot Bitcoin exchange-traded fund (ETF) was a significant driver of price movements during the period; this was subsequently approved in January 2024.

 
ECONOMIC INDICATORS

 

thecontrol-line-graph-gms-cpi-2024q1
ROLLING 12-MONTH CONSUMER PRICE INDEX
25 YEARS THROUGH MARCH 2024

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4% in March following a 0.4% increase in February. The all-items index rose 3.5% before seasonal adjustment over the previous twelve months. Over the past twelve months, the major contributors have included transportation services, up 10.7% (driven by motor-vehicle insurance, up 22.2%), tobacco and smoking products, up 6.8%, and shelter, up 5.7%.

thecontrol-line-graph-gms-gdp-2024q1
REAL GROSS DOMESTIC PRODUCT
25 YEARS THROUGH Q4 2023

During Q4 2023, real GDP rose at an annual rate of 3.4% followed by the 4.9% increase in Q3 2023. The increase primarily reflected increases in consumer spending, state and local government spending, exports, non-residential fixed investment, federal government spending, and residential fixed investment, partly offset by a decrease in private inventory investment; imports also increased. Overall, 18 of 22 industry groups contributed to real GDP growth over the fourth quarter.

CoverImage_GMS_RetailSection
RETAIL SALES

Total retail and food sales increased 0.6% and decreased 1.1% month to date and year to date, respectively, as of the end of February. Total sales from December 2023 through February 2024 were up 2.1% compared to the same period one year ago. In the past year, significant contributors included non-store retailers and food services and drinking places.

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Unemployment RATE
25 YEARS THROUGH MARCH 2024

A total of 931,000 jobs were created in the first quarter of 2024, outpacing the previous quarter’s gains of 494,000. The US economy added 303,000 jobs in March 2024, which is above the twelve-month average monthly gain of 231,000. March’s notable job gains occurred within government (+71,000), healthcare (+72,000), and construction (+39,000).

Both the unemployment rate, at 3.8%, and the number of unemployed people, at 6.4 million, changed little in March. The labor-force participation rate slightly increased in the first quarter to 62.7%.

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CBOE VIX DAILY CLOSING VALUES
LAST 10 YEARS

Market volatility, as measured by the VIX Index, had an average close in Q1 2024 at 13.69, trending down from Q4 (15.29) and Q3 (15.01). The index has dropped below its five-year average of 21.21, reflecting the continuation of a protective investing environment. Investors look towards alternative investments as economic development pressures (interest rates and inflation) continue.

 
DOMESTIC EQUITIES

 

CPI
CPI

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in December, following a 0.1% increase in November.  The all-items index rose 3.4% before seasonal adjustment over the previous twelve months.  Over the past twelve months, the major contributors include transportation services, up 9.7% (driven by motor-vehicle insurance, up 20.3%), tobacco and smoking products, up 7.8%, and shelter, up 6.2%.

GDP
GDP

During Q3 2023, real GDP rose at an annual rate of 4.9% followed by a 2.1% increase in Q2 2023.  The increase was driven by consumer spending and inventory investment; imports also increased. Overall, 14 of 22 industry groups contributed to real GDP growth in the third quarter; the value added from private goods-producing industries was particularly strong at 10.2%.

Retail Sales
Retail Sales

Total retail and food sales increased 0.3% and 4.1% month-to-date and year-to-date ending November 2023, respectively.  Total sales from September through November 2023 were up 3.4% compared to the same period one year ago; the percentage change over the same period was up 0.4%.  Significant contributors include non-store retailers and food services and drinking places. 

Unemployment
Unemployment
A total of 494,000 jobs were created in the fourth quarter of 2023, which did not outpace the previous quarter’s gains of 710,000.  The US economy added 216,000 jobs in November, which is below the twelve-month average monthly gain of 225,000. December’s notable job gains occurred within the following industries: government (+52,000), health care (+38,000), social assistance (+21,000), and construction (+17,000).
 
The unemployment rate remains unchanged from the previous quarter’s average at 3.7%.  The number of unemployed persons (6.3 million) experienced minimal net movement as well.  The labor force participation rate decreased by 0.3% in December (62.5%).
VIX
VIX

Market volatility, as measured by the VIX Index, had an average close in Q4 2023 at 15.29, trending up from Q3 (15.01) and down from Q2 (16.48).  The index has dropped below its five-year average of 20.58, reflecting positive investor sentiment and a high level of comfort with the overall direction of the economy.

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Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%
Title
0%
0%
0%
0%
0%
0%

 

  Header Header
Header Q4 2023 YTD Q4 2023 YTD 
Title1
0%
0%
0%
0%
Title2
0%
0%
0%
0%
Title3
0%
0%
0%
0%
Title4
0%
0%
0%
0%
Title5
0%
0%
0%
0%

 

  Header Header
Header Q4 2023 Q4 2023
Title1
0%
0%
Title2
0%
0%
Title3
0%
0%
Title4
0%
0%
Title5
0%
0%

 

Country Best Performing Style
Title1
Value
Title2
Value
Title3
Value
Title4
Value
Title5
Value
Title6
Value
Title7
Value
Title8
Value
Title9
Value
Title10
Value
Title11
Value
Title12
Value
Title13
Value
Returns by style:
  Q1 2024 YTD   Q1 2024
YTD
Large Cap Value
 9.4% 9.4%
Large Cap Value
 11.7% 11.7%
Mid Cap Value
 8.2% 8.2%
Mid Cap Value
 9.5% 9.5%
Small Cap Value
 2.9% 2.9%
Small Cap Value
 7.6% 7.6%
Returns by style
  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Value
0%
0%
Mid Cap Value
0%
0%
Mid Cap Value
0%
0%
Small Cap Value
0%
0%
Small Cap Value
0%
0%

 

  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Growth
0%
0%
Mid Cap Value
0%
0%
Mid Cap Growth
0%
0%
Small Cap Value
0%
0%
Small Cap Growth
0%
0%

 

SECTOR Returns BY CAPITALIZATION
  U.S. Large Cap U.S. Mid Cap U.S. Small Cap
  Q4 2023 YTD Q4 2023 YTD  Q4 2023 
YTD
Basic Materials
0%
0%
0%
0%
0%
0%
Consumer Goods
0%
0%
0%
0%
0%
0%
Consumer Services
0%
0%
0%
0%
0%
0%
Financials
0%
0%
0%
0%
0%
0%
Health Care
0%
0%
0%
0%
0%
0%
Industrials
0%
0%
0%
0%
0%
0%
Oil & Gas
0%
0%
0%
0%
0%
0%
Real Estate
0%
0%
0%
0%
0%
0%
Technology
0%
0%
0%
0%
0%
0%
Telecommunications
0%
0%
0%
0%
0%
0%
Utilities
0%
0%
0%
0%
0%
0%
Source: Russell Investments & Industry Classification Benchmark
Large Cap: Russell Top 200 Index | Mid Cap: Russell Mid Cap Index | Small Cap: Russell 2000 Index

 

us valuations
  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
US Large Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
US Mid Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
US Small Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

international valuations
  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
International Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%

 

  Quarter Ending 12/31/2023 Quarter Ending 9/30/2023
Emerging Markets Equity Value Growth Value Growth 
Price/Earnings Ratio
0%
0%
0%
0%
IBES LT Growth (%)
0%
0%
0%
0%
1 Year Forward P/E Ratio
0%
0%
0%
0%
Negative Earnings (%)
0%
0%
0%
0%
Source: Russell Investments Total Equity Profile

 

non-us developed / emerging cap & style
  Q4 2023 YTD   Q4 2023
YTD
Large Cap Value
0%
0%
Large Cap Value
0%
0%
Mid Cap Value
0%
0%
Mid Cap Value
0%
0%
Small Cap Value
0%
0%
Small Cap Value
0%
0%

 

  Header Header
Header Q4 2023 Q4 2023
Title1
0%
0%
Title2
0%
0%
Title3
0%
0%
Title4
0%
0%
Title5
0%
0%

 

Country Best Performing Style
Australia
Value
Brazil
Value
Canada
Value
China
Value
France
Value
Germany
Value
Hong Kong
Value
Indonesia
Value
Italy
Value
Japan
Value
Mexico
Value
Singapore
Value
Spain
Value
Thailand
Value

 

SMALL CAP VALUE VS. GROWTH

ROLLING 1-YEAR PERFORMANCE VS. RUSSELL 2000

12/31/2013 TO 3/31/2024

MID CAP VALUE VS. GROWTH

ROLLING 1-YEAR PERFORMANCE VS. RUSSELL MID CAP

12/31/2013 TO 3/31/2024

LARGE CAP VALUE VS. GROWTH

ROLLING 1-YEAR PERFORMANCE VS. RUSSELL TOP 2000

12/31/2013 TO 3/31/2024

SECTOR Returns BY CAPITALIZATION:
  U.S. Large Cap U.S. Mid Cap U.S. Small Cap
  Q1 2024 YTD Q1 2024 YTD  Q1 2024
YTD
Basic Materials
 7.2 7.2 8.4 8.4 2.6 2.6
Consumer Goods
 5.5 5.5 10.0 10.0 1.2 1.2
Consumer Services
 8.1 8.1 7.9 7.9 4.8 4.8
Financials
 12.9 12.9 12.6 12.6 -1.8 -1.8
Health Care
 9.6 9.6 5.1 5.1 5.5 5.5
Industrials
 8.6 8.6 12.6 12.6 9.7 9.7
Oil & Gas
 13.8 13.8 10.8 10.8 9.8 9.8
Real Estate
 -3.4 -3.4 0.0 0.0 -1.4 -1.4
Technology
 14.0 14.0 6.7 6.7 13.6 13.6
Telecommunications
 4.5 4.5 -12.7 -12.7 -12.8 -12.8
Utilities
 6.1 6.1 7.1 7.1 -1.7 -1.7
Source: Russell Investments & Industry Classification Benchmark
Large Cap: Russell Top 200 Index | Mid Cap: Russell Mid Cap Index | Small Cap: Russell 2000 Index

GLOBAL EQUITY

DIVIDEND YIELDS

GLOBAL EQUITY

DIVIDEND YIELD DIFFERENTIALS

GLOBAL EQUITY

PRICE / EARNINGS RATIOS

GLOBAL EQUITY

PRICE / EARNINGS RATIO DIFFERENTIALS

 
GLOBAL EQUITIES
GLOBAL EQUITY PERFORMANCE

Global equity markets continued their ascent with the S&P 500, MSCI EAFE, and MSCI Emerging indices gaining 10.6%, 5.8%, and 2.4%, respectively. A resilient US economy, steady earnings growth, and expectations of rate cuts by the Fed and ECB added fuel to the rally that started in 2023.

The MSCI All Country World Index (ACWI) finished the quarter up 4.7%, as US and international developed markets posted sizeable gains. Overall, emerging markets performed positively as well, with the notable exception of Brazil. Portugal was the worst performing of the developed markets, as policy uncertainty stemming from a snap election weighed on investor sentiment. However, most of developed Europe posted a solid quarter, led by gains in Ireland and Italy.

Peru was the top-performing emerging market following measures concerning currency and monetary policy easing, including a reduction in the country’s reference rate to 6.5%. Egypt posted double-digit declines after the country moved forward with currency market reforms, resulting in a rapid devaluation of the Egyptian pound.


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US VALUATIONS

Price multiples expanded across the domestic equity market in Q1. Multiple expansion was greatest among small-cap growth equities, while their value counterparts experienced the lowest relative re-rating on a forward-looking P/E basis. On a normalized basis, the S&P 500 Index remains expensively priced, trading at a cyclically adjusted P/E (CAPE) more than two standard deviations above its long-term average.

Earnings growth estimates for US equities declined over the quarter, with Q1 earnings now expected to grow 3.2% year over year (down from an estimated 5.7% at the beginning of the quarter). Overall, six of the eleven sectors are projected to increase earnings, led by utilities (+24%), tech (+20%), communication services (+19%), and consumer discretionary (+15%). Conversely, energy (-26%), materials (-24%), and healthcare (-7%) are expected to post the most significant declines. Looking ahead, analysts’ estimates currently predict earnings and revenue growth of 10.9% and 5.1%, respectively, for CY 2024.

  Quarter Ending 3/31/2024 Quarter Ending 12/31/2023
US Large Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
 22.4 36.2 20.3 36.4
IBES LT Growth (%)
 8.7 17.8 8.0 13.8
1 Year Forward P/E Ratio
 16.8 28.8 15.4 27.1
Negative Earnings (%)
 5.9 1.7 7.9 2.7

 

  Quarter Ending 3/31/2024 Quarter Ending 12/31/2023
US Mid Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
 24.2 36.8 23.4 39.1
IBES LT Growth (%)
 8.7 15.6 7.6 15.8
1 Year Forward P/E Ratio
 17.0 26.8 15.6 24.7
Negative Earnings (%)
 10.8 10.6 11.5 16.7

 

  Quarter Ending 3/31/2024 Quarter Ending 12/31/2023
US Small Cap Equity Value Growth Value Growth 
Price/Earnings Ratio
 27.4 16.9 23.8 83.5
IBES LT Growth (%)
 8.4 16.1 7.9 14.3
1 Year Forward P/E Ratio
 12.8 21.1 12.3 18.6
Negative Earnings (%)
 24.2 27.6 23.9 30.8
INTERNATIONAL VALUATIONS

Both non-US developed growth- and value-style equities registered multiple expansion during the quarter, with forward price multiples expanding by high single digits. On both an absolute and relative basis, international equities continue to trade at a discount relative to historical averages (as compared to US equities). Emerging-market valuations trended slightly higher in Q1, although they remain cheap on both an absolute and relative basis.

Europe is expected to increase earnings by 3% in 2024 and 10% in 2025, while Japan’s earnings are expected to increase 10% and 8%, respectively. The broader emerging markets are expected to grow by 17% and 15%, respectively, in 2023 and 2024.

  Quarter Ending 3/31/2024 Quarter Ending 12/31/2023
International Equity Value Growth Value Growth 
Price/Earnings Ratio
 12.5 25.8 10.8 23.7
IBES LT Growth (%)
 5.6 11.7 5.5 12.5
1 Year Forward P/E Ratio
 10.6 22.5 9.8 20.5
Negative Earnings (%)
 5.6 2.4 6.7 3.2

 

Emerging Markets Equity Quarter Ending 3/31/2024 Quarter Ending 12/31/2023
Price/Earnings Ratio
 16.9 15.7
IBES LT Growth (%)
 14.7 12.3
1 Year Forward P/E Ratio
 13.5 13.3
Negative Earnings (%)
 4.4 5.1
Source: Russell Investments Total Equity Profile

 

non-us developed / emerging cap & style: MSCI AC WORLD EX - US INDICES
(SOURCE: MSCI - DATA SOURCED 'AS IS')
  Q1 2024 YTD   Q1 2024
YTD
Large Cap Value
 0.2% 0.2%
Large Cap Growth
 3.3% 3.3%
Mid Cap Value
 -1.1% -1.1%
Mid Cap Growth
 1.8% 1.8%
Small Cap Value
 -1.1% -1.1%
Small Cap Growth
 -0.4% -0.4%
Country Best Performing Style
Australia Growth
Brazil Value
Canada Growth
China Value
France Growth
Germany Growth
Hong Kong Value
Indonesia Value
Italy Growth
Japan Value
Mexico Value
Singapore Growth
Spain Value
Thailand Growth
United Kingdom Growth

 

 
HEDGE FUNDS
HEDGE FUND PERFORMANCE
 
PRIVATE EQUITY
PRIVATE EQUITY PERFORMANCE
 
FIXED INCOME
US SPREAD PRODUCTS

The investment-grade corporate bond market returned -40 bps for the quarter. The return drivers were rates (-), spreads (+), and coupons (+). A rising interest-rate environment was the only driver of this market’s negative return. This market has an average duration of seven years and its credit spread is trading at a historically tight level; therefore, its return is very sensitive to changes in the general level of interest rates. This market’s option-adjusted spread (OAS) tightened by 9 bps to end the quarter at 90 bps, which is approximately 20 bps below the ten-year median spread (120 bps) and its tightest level since 2021. Performance by credit quality favored lower-quality issues: Baa-rated corporates, -20 bps; A-rated corporates, -50 bps; and Aa-rated corporates, -90 bps. This market’s issuance totaled approximately $540 billion for the quarter, a 30% increase from the corresponding period in 2023.

The high-yield corporate-bond market returned 1.5% for the quarter. The return drivers were rates (-), spreads (+), and coupons (+). Tighter credit spreads and cash coupons more than offset the negative price impact caused by the rising interest-rate environment. This market’s OAS tightened by 24 bps to end the quarter at 299 bps, approximately 90 bps below the ten-year median spread and its tightest level since the earliest days of 2022. However, this is a bifurcated market; Ba- and B-rated corporates’ OAS are trading at their lowest levels since 2007, while the Caa-rated corporate OAS is approximately 250 bps wider than at its cycle nadir in mid-2021. In general, higher-quality credits have relatively longer-maturity debt, and a general increase in risk appetite and rising interest rates helped lower-quality credits outperform: Caa-rated corporates, 2.1%; B-rated corporates, 1.4%; and Ba-rated corporates, 1.1%. This market’s issuance totaled approximately $90 billion for the quarter, an increase of nearly 120% from the corresponding period in 2023.

Russell2000_shutterstock_2294146949

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test-4-gms
GDP

During Q3 2023, real GDP rose at an annual rate of 4.9% followed by a 2.1% increase in Q2 2023.  The increase was driven by consumer spending and inventory investment; imports also increased. Overall, 14 of 22 industry groups contributed to real GDP growth in the third quarter; the value added from private goods-producing industries was particularly strong at 10.2%.

test-4-gms
Retail Sales

Total retail and food sales increased 0.3% and 4.1% month-to-date and year-to-date ending November 2023, respectively.  Total sales from September through November 2023 were up 3.4% compared to the same period one year ago; the percentage change over the same period was up 0.4%.  Significant contributors include non-store retailers and food services and drinking places. 

test-4-gms
Unemployment

A total of 494,000 jobs were created in the fourth quarter of 2023, which did not outpace the previous quarter’s gains of 710,000.  The US economy added 216,000 jobs in November, which is below the twelve-month average monthly gain of 225,000.  December’s notable job gains occurred within the following industries: government (+52,000), health care (+38,000), social assistance (+21,000), and construction (+17,000).

The unemployment rate remains unchanged from the previous quarter’s average at 3.7%.  The number of unemployed persons (6.3 million) experienced minimal net movement as well.  The labor force participation rate decreased by 0.3% in December (62.5%).

test-4-gms
VIX

During Q2 2023, real GDP rose at an annual rate of 2.1%, following a 2.2% increase in Q1. The increase was driven by state and local government spending, non-residential fixed investment, and consumer spending, partially offset by a decrease in exports; imports also decreased. Relative to Q1, the second quarter experienced a slowdown in consumer and federal government spending alongside the decline in exports, which drove the Q2 deceleration of real GDP.

 
MID CAP VALUE VS. GROWTH
ROLLING 1-YEAR PERFORMANCE VS. RUSSELL 2000
12/31/2013 TO 12/31/2023

LARGE CAP VALUE VS. GROWTH
 
ROLLING 1-YEAR PERFORMANCE VS. RUSSELL 2000
 
12/31/2013 TO 12/31/2023
 
 
Charts
YIELD CURVE

US Treasury yields rose during the quarter, walking back some of the steep declines that occurred in the final quarter of 2023. Yields increased by approximately 30-40 bps for the two-, five-, ten-, and 30-year notes and bonds; this part of the curve remained modestly inverted and settled in a range of 4.2-4.6%, while Treasury bills remained comfortably above 5%. The two- to ten-year spread decreased by 4 bps (to -39 bps). This spread has been negative for a record 21 months, eclipsing the previous record of 624 days of inversion set in 1978.

The yield curve’s shift higher can be attributed to the continuation of solid economic growth and sticky inflation, neither of which have slowed, defying expectations. Indeed, core PCE inflation appears to be re-accelerating—although the year-over-year rate through February is 2.8%, the six-month trailing annualized rate is 2.9% and the three-month trailing annualized rate is 3.5%.

At the end of the first quarter, the federal-funds futures market predicted a target rate of 4.7% by the end of 2024—this is approximately in line with expectations of Fed officials (4.6%).

GMS_TreasuryYields_2024Q1

 

GMS_TreasuryYieldCurve_2024Q1

 

 

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