After advancing strongly through the summer, US equity markets traded in a narrow range in the weeks leading up to the US Presidential election. They jumped after the result became clear, presumably a reflex move based on the supposition that a Republican administration might somehow be more business-friendly than a Democratic one. After the initial post-election rally, however, markets became volatile as participants began to consider the impossibility of parsing the incoming administration’s scattershot pronouncements on high tariffs, mass deportations of immigrants, and large cuts in government spending. In the following weeks, analysts expressed concerns that if some of those pronouncements were to become policy, they could result in inflation. They also might not be so “pro-growth” as many suppose – especially since the resulting increases in the public debt (no one seems to take seriously the possibility of big spending cuts) could drive market interest rates higher, limiting the Federal Reserve’s ability to lower policy rates. In December, then, the markets gave back much of their earlier gain. For the full quarter, the S&P 500 index returned +2.41%, with the largest growth stocks again performing best. Smaller stocks lagged; the Mid-cap 400 index returned +0.34% for the quarter, and the Small-cap 600 index returned –0.58%. [Index returns: Standard and Poors]
Overseas, the MSCI EAFE international equity index returned –0.62% in local currencies. However, the possibility of high tariffs and increasing interest rates drove the US dollar sharply higher. It shot up to 157.37 yen, from 143.25 at the end of September. It strengthened to $1.0351 against the euro and $1.2521 against the pound Sterling, compared to September 30 levels $1.1145 and $1.3399, respectively. Such a move reduces the dollar prices of most foreign assets, so EAFE returned –8.11% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
The prospects for the incoming administration’s possible policies drove interest rates sharply higher, especially at longer maturities. The yield on the two-year US Treasury note ended the quarter at 4.25%, up from 3.66% at the end of September. The ten-year yield rose to 4.58% from its September 30 level of 3.81%. The Bloomberg Barclays US Aggregate Bond index returned –3.06% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]
The rally that brought stock indices to new highs toward the end of the second quarter continued into the first half of July. Moderating readings on both employment and inflation seemed to point toward monetary easing by the Federal Reserve in the coming weeks, but market participants remained uncertain about the pace and timing of any Fed move, and the US stock market fell back sharply, bottoming after the first week in August. Around then, Fed officials began to signal their readiness to ease, and on August 23, Fed Chair Jerome Powell gave what observers interpreted as dovish (inclining toward easing) remarks at the Kansas City Fed’s annual conference in Grand Teton National Park. Aside from a pause at the beginning of September, US markets advanced for the remainder of the quarter. By the time the Fed announced a half-point reduction in its key short-term interest rate on September 18, markets had already priced in expectations for such a move. During the quarter, the S&P 500 index and the Nasdaq 100 index continued to record successive record high closes. The S&P 500 index returned +5.89% for the quarter, with value again besting growth, +9.52% to +4.63%. Smaller stocks performed even better. The Mid-cap 400 index returned +6.94% for the quarter, and the Small-cap 600 index returned 10.13%. [Index returns: Standard and Poors]
Overseas, the MSCI EAFE international equity index returned +0.82% in local currencies. With US monetary easing commanding global attention, the US dollar weakened sharply during the quarter. It tumbled to 143.25 yen, from 160.88 at the end of June. It also weakened to $1.1145 against the euro and $1.3399 against the pound Sterling, compared to June 30 levels $1.0711 and $1.2743, respectively. For US investors holding foreign securities, the currency move was a strong positive, and EAFE returned +7.26% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
As we might expect in the wake of a Fed easing, interest rates fell sharply during the quarter, particularly at shorter maturities. The yield curve, which had been inverted (short-term Treasury rates higher than long-term) for an extended period, flipped back to a more normal shape. The yield on the two-year US Treasury note ended the quarter at 3.66%, down from 4.71% at the end of June. The ten-year yield fell to 3.81% from its June 30 level of 4.36%. The Bloomberg Barclays US Aggregate Bond index returned +5.20% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]
After several months of steady gains, especially among a few of the largest, technology-oriented stocks, the US stock market cooled at the start of the second quarter. While many observers had initially expected the Federal Reserve to begin cutting short-term interest rates early in the year, a series of strong employment reports and slightly above-target inflation reports persuaded most market participants that no rate reductions will occur until at least late summer. Partly as a result, stocks fell back for much of April. They regained their footing in May, and for much of that month, most segments of the market saw gains. In June, however, the market narrowed substantially. Some of the very largest growth stocks, especially those that investors could connect with the possible emergence of business driven by artificial intelligence, continued to rise, while other stocks lagged. The S&P 500 index and the Nasdaq 100 index each recorded a succession of record high closes. The S&P 500 index returned +4.28% for the quarter, with value besting growth, +9.59% to –2.10%. Smaller stocks, though, seemed to inhabit a different market. The Mid-cap 400 index returned –3.45%, and the Small-cap 600 index returned –3.11%, for the quarter. [Index returns: Standard and Poors]
Global markets were mixed, with the MSCI EAFE international equity index returning +1.00% in local currencies. With rates still high and the US economy performing well, the dollar remained strong, rising to 160.88 yen, from 151.22 at the end of March. It also strengthened to $1.0711 against the euro, from $1.0791 March 31, and it remained steady against the pound Sterling, ending June at $1.264 against the UK currency, from $1.2743 three months earlier. EAFE returned –0.42% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Interest rates moved a bit higher during the quarter, as the hoped-for rate cuts seemed to recede further into the future. The yield on the two-year US Treasury note ended the quarter at 4.71%, up from 4.59% at the end of March. The ten-year yield rose to 4.36% from its March 31 level of 4.29%. Intermediate-term rates are close to longer-term rates; yields on five- and seven-year Treasuries both ended the quarter at 4.33%. The Fed’s interest rate policy has its most direct effects on shorter rates, which remain higher. The Bloomberg Barclays US Aggregate Bond index returned +0.07% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]
In May, the Fed announced that it would slow the rate at which it reduces the size of its balance sheet. This stealth shift toward a slightly more expansive monetary policy lent some support to the US stock market. The advance, however, was narrow, with a select group of large technology stocks accounting for a large fraction of the gains. The S&P 500 index rose 3.59%, the MidCap 400 lost 1.58%, and the SmallCap 600 fell 2.28%. Growth stocks, companies priced more on future prospects, proved to be even more dominant with the S&P 500 Growth index returning +6.89%, and value (“cheaper”) stocks performed poorly with the S&P 500 Value index returning -0.65%. Smaller companies continued to underperform, with the Russell SC Completeness index, the largest 3000 companies excluding the largest 500, returning -0.03%. Large companies continued outperforming with the Russell Top 200 index, the 200 largest companies, returning +4.50%. The outperformance of growth stocks and large companies continued the trends noticed in May. [Index returns: Standard and Poors, FTSE Russell]
Global Markets shrank, with the MSCI EAFE international equity index falling 0.68% in local currencies. The US dollar strengthened slightly against European currencies, rising from $1.2738 to $1.2640 against the pound Sterling and from $1.0846 to $1.0711 against the Euro. Against the Yen, the dollar rose from 157.19 to 160.88 Yen. As a result, the EAFE returned -1.61% in USD. [Index returns: MSCI; currency rates: Federal Reserve H.10 Release]
Interest rates moved slightly lower during the quarter as the Fed did not announce a rate-cut but noted interest rates were slowly heading towards the 2% target. The two-year yield dropped from 4.89% to 4.71% and the 10 year yield dropped from 4.51% to 4.36%. The five-year and seven-year yields both dropped from 4.52% to 4.33%, showing that intermediate-term rates are in line with long-term rates. The Bloomberg Barclays US Aggregate Bond Index returned +0.95% for the month. [Index returns: Bloomberg; bond yields: US Treasury]
Darius Tirgan
The month began with the Federal Open Market Committee (FOMC) announcing no change to federal interest rates, but a slowing in the pace at which it will shrink its balance sheet, starting June 1st. Many viewed this as a slight easing of policy, and a confirmation that an interest rate cut would be coming soon. The market’s ongoing momentum carried into most of May in anticipation of a future cut, but winning streaks snapped in the last week. However, May remained a strong month for the market. The S&P 500 Index gained 4.96%, the Mid-Cap 400 returned +4.39%, and the Small-Cap 600 returned +5.04%. The S&P 500 Growth index, comprising companies thought to be priced more on their future prospects, regained its dominance by returning +6.60% outperforming the S&P 500 Value index, (“cheaper” stocks), which returned +2.97%. The Russell Top 200 index, the 200 largest companies, returned +5.28% and the Russell SC Completeness index, the largest 3000 companies excluding the largest 500, returned +3.44%. This was an interesting turn of events, as smaller companies often have greater room to expand and tend to grow more. This could potentially be explained by the strong outlook for artificial intelligence, which resulted in NVIDIA (NVDA) experiencing a +25% return, from $850.77 to $1096.33, and boosted other growth stocks. [Index returns: Standard and Poors, FTSE Russell; NVIDIA returns: Nasdaq]
Global Markets also gained, with the MSCI EAFE international equity index returning +2.46% in local currencies. The US dollar weakened slightly against European currencies. The dollar fell to $1.2738 from $1.2514 against the pound Sterling and $1.0846 from $1.0684 against the Euro. It stayed relatively even against the Yen, only falling from 157.54 to 157.19. As a result, the EAFE returned 3.87% in US Dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 Release]
With the FOMC announcement, the two-year US Treasury note and ten-year US Treasury note yields fell from 5.04% and 4.69% to 4.73% and 4.36% on April 15th respectively. Inflation was better than expected, with the Consumer Price Index report, the change in prices of a basket of goods meant to typify a household budget, coming in at +0.3%, lower than the projected +0.4%. However, weak bond auctions led to the yields rising to end the month at 4.89% for the two-year note and 4.51% for the ten-year note respectively. The Bloomberg Barclays US Aggregate Bond Index returned +1.70% for the month. [Index returns: Bloomberg; bond yields: US Treasury]
Darius Tirgan
The rally that drove stock prices higher for the final ten weeks or so of 2023 persisted into the new year. Corporate reports and economic indicators, including broad measures of inflation, continued to post encouraging readings. In addition, observers noted a shift in emphasis in public remarks by Federal Reserve Chair Jay Powell, away from inflation and toward the employment component of the Fed’s dual mandate. Many took this as a signal that the central bank may adopt a less restrictive monetary policy later this year. Some had anticipated a possible decrease in the Fed’s policy rate as early as March, but the market had shifted away from that expectation well before the Fed’s meeting in that month, at which they held rates steady. For most of January and February, the strength of the market-weighted stock indices primarily reflected the performance of a few of the largest growth stocks, with the rest of the market lagging. In March, however, a broader cross-section of stocks participated in the gains. Major market indices ended the quarter near long-term peaks. The S&P 500 index returned +10.56% for the quarter. The Mid-cap 400 index returned +9.95%, and the Small-cap 600 index returned +2.46% for the quarter, after a negative return for the first two months of the year. [Index returns: Standard and Poors]
Global markets also gained, with the MSCI EAFE international equity index returning +9.96% in local currencies. The US dollar strengthened against other currencies, as US economic performance remained strong, and US interest rates crept higher. The dollar rose to 151.22 yen, from 140.92 at the end of December. It also strengthened to levels of $1.2637 to the pound Sterling and $1.0791 against the euro, from December 31 levels of $1.2743 and $1.1062, respectively. Despite the currency effect, which reduced returns for US investors in foreign securities, EAFE returned +5.78% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Interest rates moved higher during the quarter, as the hoped-for March rate cut did not materialize, and bond issuance by the US Treasury remained large. The yield on the two-year US Treasury note ended the quarter at 4.59%, up from 4.23% at the end of December. The ten-year yield rose to 4.20% from its December 31 level of 3.88%. The Bloomberg Barclays US Aggregate Bond index returned –0.78% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]