During the first quarter of 2024, Wall Street saw positive growth, but market confidence has since declined due to uncertainty around potential interest rate cuts by the Federal Reserve amidst hot inflation data and geopolitical turmoil. Despite this, the US economy remains strong, and the Fed has signaled an end to rate hikes. Investors are facing a complex environment, with SPDR chief investment strategist Michael Arone highlighting three key insights that may surprise them: small- and mid-cap stocks outperforming large-cap stocks, the myth of Magnificent 7 dominance, and negative performance from long-duration US Treasuries for the first time ever.
Arone points out that small- and mid-cap stocks have outperformed large-cap stocks in recent months, contrary to popular belief that the Magnificent 7 were driving the market. The shift in performance was triggered by the Treasury issuing bills instead of longer coupon debt, leading to a rate cut rally that benefited smaller stocks. While the S&P 500 has regained leadership, Arone believes that as the Fed likely cuts rates later in the year, small- and mid-cap stocks will see a resurgence in performance.
Market concentration and the dominance of the Magnificent 7 are considered myths so far in 2024, as sectors like industrials, financials, and energy have outperformed technology, and global markets have performed equally well as the S&P 500. Arone also notes that long-duration Treasuries have delivered negative performance post the Fed’s last rate hike in July, deviating from the typical pattern of rates falling after rate hikes. Factors like better-than-expected growth, sticky inflation, and increased supply of Treasury debt have contributed to higher rates.
Buffett hosted his annual Berkshire Hathaway shareholder meeting without his longtime partner Charlie Munger, who passed away in November. The event had a somber tone, but Berkshire reported a rise in operating profits and a Class A stock increase of nearly 10% in 2024. Retailers in the US have been forced to drop prices on various products to attract consumers amid inflation, with discretionary items like home decor and hobby kits seeing markdowns. This shift reflects a broader trend of consumer spending facing challenges in a changing economic landscape.
Despite uncertainty surrounding interest rate cuts and market performance, investors are advised to consider the opportunities presented by small- and mid-cap stocks, the diverse sector performance in 2024, and the implications of changing Treasury yields. The current economic landscape poses challenges with geopolitical tensions, inflation, and consumer spending dynamics, but also offers the chance for investors to reassess their portfolios and take advantage of potential opportunities in a shifting market environment.
