In March, there were some unexpectedly positive economic reports. The US economy saw its fastest pace of growth since January 2023 (+0.8% in March and 3% annualized), personal spending reached a new high, and manufacturing activity in the US and around the world expanded for the first time since September 2022. Unemployment in the United States hit a new peak of 3.9% in January 2022.
March saw gains across the board for the S&P 500, with the best results coming from industries other than technology and consumer discretionary. U.S. equities were led by energy (+10.6%), utilities (+6.6%), and materials (+6.5%), sectors that had been underperforming but seemed to provide relative value to some investors. In a similar vein, small-cap stocks did better than large-cap stocks that month.
The returns on foreign equities were comparable to those on American markets. The growing speculation that the ECB would begin cutting interest rates in June helped propel the Eurozone (+4.2%) to outperform developed market counterparts. Although Egypt's market lost a third of its dollar worth when the nation depreciated its currency to qualify for IMF money, developing markets like Taiwan's (+7.9%) were boosted by the AI-fueled growth in semiconductors.
By signaling a more optimistic outlook—GDP growth of 2.1% for 2024—and by reducing the sale of bonds on the Fed balance sheet, the Fed left its benchmark interest rate steady. With investment-grade bonds increasing by over 1% in March, U.S. fixed income as a whole was positive. Investors were expecting a slowdown in default growth, which led to higher rates on junk bonds (+1.2%), which led the pack. With the possibility of reduced bond sales by the Fed, mortgage-backed securities (+1%) gained some traction.
Infrastructure equities (+4.6%), which had been trailing behind public stock markets so far in 2024, were among the top performing categories in March's public financial markets, helped along by the same valuation tailwinds that boosted energy and utilities. Speculators gambled on worsening economic circumstances, lower interest rates, and a weaker U.S. currency, leading commodities (+3.3%) to perform strongly, with gold futures (+8.3%) accounting for the majority of the gains.
The allure of private finance in the United States and Europe persists, and may perhaps have increased, given the noticeable increase in distress indicators. While most defaults are happening in the healthcare and pharmaceutical industries right now, similar pressure may quickly spread to other sectors. In the past, investors who were willing to wait for the right opportunities may profit from exposures to certain asset classes in illiquid markets that were going through capital dislocations.
There are just as many reasons to be hopeful as there are to be gloomy, as much of the economic data we've seen so far remains on the fence as we go into spring. High interest rates have had little impact on the property market, consumer spending has seen a minor uptick, and the job market is cooling but still stable. Inflation is a little more than anticipated, and consumer confidence has declined.