The first quarter of 2024 started off strong for Wall Street, but investor confidence has since waned due to uncertainty about potential interest rate cuts and geopolitical chaos. Despite this, the US economy remains strong, and the Federal Reserve has halted rate hikes. This has created a complex investing environment, with SPDR chief investment strategist Michael Arone outlining three key factors that investors should be aware of, including the outperformance of small- and mid-cap stocks, the myth of the Magnificent 7 dominance, and the negative performance of long-duration US Treasuries for the first time ever.
Small- and mid-cap stocks have actually outperformed large-cap stocks in recent months, a trend that may be surprising to many investors who believed the S&P 500 was driving the market. As Treasury bill issuances and potential rate cuts by the Fed led to a rally, mid- and small-cap stocks benefited the most. However, with changing expectations for rate cuts, the S&P 500 has regained leadership, but Arone believes that once the Fed begins cutting rates, small- and mid-cap stocks will once again outperform.
Arone dismisses the notion of market concentration and the Magnificent 7 dominance, pointing out that different sectors have performed well this year, such as industrials, financials, and energy outperforming technology. Additionally, global markets like EuroStoxx 50 and Japanese equities have performed equally or better than the S&P 500. Despite the outperformance of the Magnificent 7, other sectors and assets like gold have done well, illustrating the importance of a diversified portfolio.
Long-duration Treasuries have experienced negative performance since the Fed’s last rate hike in July, a departure from the usual pattern of falling rates after rate hikes. Factors such as better-than-expected growth, sticky inflation, and increased Treasury debt issuance have contributed to the rise in rates. The Fed’s decision to wind down its quantitative tightening program could potentially impact Treasury yields, with economic data suggesting a slower growth rate that may lead to falling yields.
At Berkshire Hathaway’s annual shareholder meeting, Warren Buffett appeared without his longtime partner Charlie Munger for the first time since Munger’s passing. The company also reported its first-quarter earnings, which showed operating profits rising to $8,825 per Class A share. Berkshire’s stock has outperformed the S&P 500 this year, closing the quarter with a net profit of $12.7 billion. Despite the absence of Munger, Buffett’s expected successors Greg Abel and Ajit Jain joined him on stage.
Retailers are facing challenges due to reduced consumer spending, leading to price cuts and markdowns on products in an attempt to attract shoppers. Inflation has pushed prices higher, forcing retailers to adjust to the changing consumer behavior. Companies like Ikea have reduced prices on discretionary purchases like dinnerware sets and furniture, signaling a shift in the retail landscape as stores try to entice consumers to spend. The outcome of this game of chicken between stores and shoppers has broader implications for the American economy, which heavily relies on consumer spending.
