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]