Kensington Market Insights - April 4

By Brian Weisenberger, CFA, Senior Market Strategist - April 2024

Market Insights is a piece in which Kensington’s Portfolio Management team will share interesting and thought-provoking charts that we believe provide insight into markets and the current investment landscape.

Last week concluded a historic first quarter for the S&P 500 (SPX), which closed at a fresh all-time high and marked the second consecutive quarter of +10% gains, a feat seen only seven other times since 1950. March also marked the fifth straight positive month for the index, gaining a remarkable 26% since last November. Perhaps the most significant aspect of this recent rally, however, is the fact that year-to-date, the S&P 500's maximum drawdown is just -1.7%, with the index going over 100 days straight without a 2% correction, a phenomenon witnessed only seven times since at least 1950.


Source: Charlie Bilello, Creative Planning, as of March 27, 2024

Bonds Slump

Bonds, on the other hand, faced a different trajectory in the first quarter. While fixed income similarly rallied through November and December, Q1 proved to be less favorable. As market expectations for Fed rate cuts dwindled from as high as seven cuts in 2024 to under three at the end of March (chart below), most bonds, particularly the more duration sensitive categories, experienced broad losses as rates rose across the yield curve.


Source: BofA Global Research as of March 8, 2024

Summary of Economic Projections (“SEP”) from the Federal Open Market Committee (FOMC)

Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

The first quarter slump in bond prices is not surprising given the repricing of rate-cut expectations, but the equity markets ability to brush off this shift has resulted in an eye-catching divergence from recent historical trend (chart below), in which stocks had been closely tracking the inverse of the presumed policy rate.


Source: Bloomberg as of April 1, 2024

With consensus inflation expectations now on the rise (chart below) and a growing belief that the Fed may not make any rate cuts in 2024, investors may start growing wary about the sustainability of the current bull run for stocks.


Source: Bloomberg as of March 28, 2024

Even without considering inflation and rate expectations, a robust five-month rally is bound to attract doubters about the market’s ability to sustain its upward trajectory. However, history has shown that such strength often leads to further gains. Dating back to 1950, when the S&P 500 achieved a 10% or more increase in the first quarter of the year, it finished the year higher in 10 out of 11 previous occurrences, with a median gain of 8.2% in the final nine calendar months (chart below).


Source: Carson Investment Research, FactSet 03/29/2024

Moreover, when the S&P 500 generated a 10% increase in back-to-back quarters (admittedly a rare occurrence), the index has been up a year later in 6 out of 7 previous instances dating back to 1950, with an average gain of 12.3% (chart below).

Source: Carson Investment Research, FactSet 03/29/2024

The recent performance of both the S&P 500 and bond markets has left investors pondering their next moves. While equities have seen a notable rally, bonds have faced headwinds due to shifting rate expectations. The divergence between these asset classes is notable, particularly as the possibility of fewer rate cuts in 2024 continues to grow. Despite historical data suggesting that strong market performance often leads to further gains, a spike in volatility may be on the horizon. Going forward, a tactical investment approach, one that remains nimble in the face of evolving market dynamics, may be prudent in navigating the unpredictable landscape ahead.


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