The first quarter of 2024 started off well for Wall Street, but investor confidence in multiple interest rate cuts has waned, leading to market volatility. Hot inflation data has pushed back the anticipated rate cuts by the Federal Reserve, causing uncertainty among investors. Despite this, the US economy remains strong, and the Fed seems to have halted rate hikes. Investors are now faced with weighing the positive aspects of the strong economy against the negative impacts of geopolitical instability and market turbulence.
One key point to consider is that small- and mid-cap stocks have outperformed large-cap stocks in recent months. This is surprising to investors who typically see the S&P 500 as the top performer, driven by the Magnificent 7 tech giants. However, mid-cap and small-cap stocks have shown better performance since interest rate cuts became uncertain. This shift may influence how investors diversify their portfolios and where they see potential growth opportunities.
Despite the current market conditions, there is an expectation that when the Fed eventually cuts interest rates later in the year, small- and mid-cap stocks may regain their outperformance. This presents an opportunity for investors to diversify away from large-cap stocks and the Magnificent 7 while they are less expensive. By investing in sectors that historically perform well during rate cuts, investors may find potential for growth in a changing market environment.
Another surprising finding is that market concentration and the Magnificent 7 tech giants are not as dominant as believed so far this year. Sectors like industrials, financials, and energy have performed better than technology. This suggests that different sectors and global markets have shown strong performance, diversifying investment opportunities. Gold and other assets have also performed well, indicating that there are alternatives to the traditional market leaders that can offer growth potential.
Furthermore, long-duration US Treasuries have delivered negative performance for the first time ever since the Fed’s last rate hike in July. This deviation from the typical pattern of rate cuts slowing the economy and lowering rates highlights the complexities of the current economic environment. Factors such as growth expectations, inflation trends, and increasing Treasury debt issuance have contributed to the unexpected rise in rates. This unique situation may impact investor strategies and portfolio allocations moving forward.
In a separate development, Berkshire Hathaway’s annual shareholders meeting took place, marking the first appearance of Warren Buffett without his longtime business partner Charlie Munger, who passed away recently. The company reported strong first-quarter earnings, with operating profits rising and Class A stock outperforming the S&P 500. However, net profits were lower compared to the previous year. Amidst these financial updates, retailers are facing challenges as they reduce prices in response to sluggish consumer spending. Price cuts on non-essential items indicate a shift in consumer behavior and its potential impact on the economy.