Trust Investment Management
Equities continued to offer robust returns as the rally broadened in the first quarter. U.S. large caps managed to advance 10.56%, reaching another all-time high. Small caps gained a healthy 5.18%, while both developed and emerging international equities rose 5.78% and 2.67%, respectively. High yield bonds were the leading fixed income asset class, rewarding investors with a 1.47% return for the quarter. Investment grade and global bonds declined 0.78% and 3.42%, respectively, however, they managed to post positive returns for the month of March. While economic data continues showing signs of strength, the Fed still expects that it will begin cutting rates this year, although later than investors initially anticipated.
The core Personal Consumption Expenditures Price Index (PCE) is the Fed’s preferred inflation gauge. The Bureau of Economic Analysis released the latest figures at the end of the quarter. PCE was up 2.8% year-over-year and in line with expectations. The Federal Open Market Committee (FOMC) meeting held in March gave meeting participants an opportunity to submit their projections of the most likely outcomes for several variables. The median projection for inflation suggests that core PCE will continue to decline to 2.6% by the end of this year, 2.2% for 2025, and 2.0% for 2026. Real gross domestic product (GDP), and the unemployment rate are projected to remain steady at 2%, and 4%, respectively.
The probability of a recession in 1 year declined to 64% (down from 65% in February, and 70.4% in January), according to the Federal Reserve Bank of Cleveland. The Conference Board Leading Economic Index (LEI) for the U.S. rose in February 2024 for the first time in two years (the LEI provides an early indication of significant turning points in the business cycle and where the economy may be heading in the near term). Additionally, investor sentiment has shifted from a recession to a soft landing over the past few months as the U.S. economy continues to be supported by the strength of the labor market and consumer spending.
Although the strong rally in the equity markets suggests that the economy is heading in the right direction, it also increases the odds for elevated volatility in the short-term.
