April 2024 Market Outlook

During the first quarter of 2024, the U.S. stock market picked up where it left off at the end of 2023, fueled by a blend of economic optimism, the expectation of interest rate cuts, and enthusiasm for the burgeoning opportunities in artificial intelligence. The S&P 500 index surged more than 10%, marking its most substantial first-quarter gain in five years. In late January, the index soared to a record high for the first time in two years and has since maintained its upward trajectory, notching numerous new highs without any significant retreat. The tech-heavy NASDAQ followed suit in late February, achieving its first record peak since November 2021.

Portfolio Highlights 

We still favor owning U.S. stocks, especially over developing markets, but we are keeping an eye on attractive opportunities in both Europe and Asia. As valuations of technology stocks continue to stretch, we favor broader indices composed of companies with strong financials, stable earnings, and robust earnings growth. Inflation is not moderating as fast as the market expected, pushing rate cut expectations out until at least June, which we feel may still be too aggressive. Therefore, we continue to like short-term bonds, while continuing to add duration along the curve as a counterweight to our equity exposure.

Market Review 

All major equity indices posted impressive gains in the first quarter. The S&P 500 rose 10.2%, its most substantial first quarter performance since 2019.  Likewise, the NASDAQ finished the first quarter up 9.11%, reaching its first record high in almost two and a half years on February 22. Though the “Magnificent 7” stocks performed well, their individual returns diverged, while the rest of the indices played catch-up. Finally, the Dow returned 5.62%, despite Boeing’s continued troubles, which dragged the stock down almost 26%. 

Ten-year U.S. Treasury bond yields were volatile during the quarter as the market adjusted, then re-adjusted, its Fed rate cut forecast. Yields were up almost 45bps from the start of year to 4.206%, due to market expectations of interest rate cuts getting pushed out from March to June of 2024. 

Volatility Corner 

The market rally that started last November has seen the S&P 500 (SPX) steamroll 28% to new all-time highs without even a 3% pullback. Meanwhile, VIX has been range-bound with an average near 14 for Q1 2024. Some people seem confounded that VIX has not moved lower, but at 13, its level implies an expected daily SPX change of less than 1% and we have had only one move of more than 2% so far this year. Barring a shock to the equity market, we would expect VIX to stay in its current range. 

Source: StockCharts.com ACP

These peaceful conditions are also reflected in the steady contango (upward slope) of the VIX futures term structure, along with a healthy premium between the front month (April) and spot VIX. There is one unusual feature, however, with a large hump in the October contract price. Uncertainty about the U.S. presidential election in November is pulled forward to the October VIX future that might be used to hedge the outcome.  Investors are obviously nervous and using VIX futures as a hedge. We suspect that the current October price of $20.60 will prove to be either too low due to increased political uncertainty or too high if the polls suddenly swing to a clear winner as the election comes into sharper focus. 

Source: CBOE Delayed Quotes

The Fed 

At the last Federal Reserve Open Market Committee meeting on March 20, the Fed signaled three 0.25bps interest rate cuts in 2024 on the expectation that inflation and growth will continue to slow. The markets now expect that there is a 58% chance of the first rate cut in June 2024, which will begin a gradual series of cuts over the next two years. Even with 0.75bps of total cuts this year the Fed’s benchmark borrowing rate will remain at 4.5%-4.75%, the highest it has been since 2007. 

Source: Goldman Sachs Global Investment Research

Given that each investor's risk tolerance and objectives are unique, we encourage you to consult with your financial advisor to assess how this information might affect your overall investment strategy.

For more information, please email us at ir@ballastrock.com should you have an questions.