Positive month and quarter end for equity markets, but not for fixed income.

During March, equity markets continued their upward trajectory, reaching new highs and closing the first quarter of 2024 as one of the best starts to a year in history. Twenty-two new highs were reached by the S&P 500 during the first three months to conclude the period with a cumulative return of 10.16%. Gains were widespread, with only the Real Estate sector accumulating negative performance. On the other hand, Communication Services, as well as the Energy and Technology sectors stood out.

During the beginning of the year, large-cap companies once again benefited more than small-cap companies, with returns of over 10% versus ~5%, respectively. Likewise, developed markets (+5.8%), driven by Japan and Europe, outperformed emerging markets (+2.2%), whose dynamism continued to be affected by the economic challenges facing the Chinese economy. Mexico was also the exception, with a small downward adjustment that left us behind in this generalized rally.

On the other hand, the story for bond markets was different, with the main indices showing slight losses during the period and the High Yield bond index being the exception. The latter benefited from its attractive yield (+8%) plus a low inflation environment and a resilient economy.

We started the year with the expectation of 6 rate cuts by the Federal Reserve by 2024, however, today this possibility has been left behind with the vast majority of investors anticipating only 3 rate cuts and starting with these, in the best case scenario, during the month of June. And while inflation has continued its downward path, there is still room for it to reflect favorable readings with respect to U.S. home prices. Conversely, oil and other commodities have bounced off their lows which could hinder the pace of inflation decline. So far, the Fed believes that the current rate level (5.50%) is appropriate, as the economy remains resilient and the labor market robust. They have also indicated that they need more evidence that inflation will not pick up to ease monetary policy again.

With equity markets disengaging from rate movements during 1Q24, corporate reports will become the focus of attention during the month of April; we will see if the expansion of multiples achieved during these months is justified or if there will be a need to think about a breather for stocks.