Investment Review for First Quarter 2024

Risky asset returns.

In the first quarter of 2024, despite reduced expectations for Federal Reserve rate cuts, stock prices surged. As a whole, global stocks experienced an 8.2% rise. Notably, U.S. large and medium-sized companies achieved substantial gains, with increases of 10.6% and 10.0%, respectively. While not as remarkable, foreign stocks also made progress, with foreign developed large companies rising by 5.8%, and emerging markets (excluding China) gaining 4.0%.

Inflation.

The outlook for Federal Reserve rate cuts has gradually diminished due to persistent inflation that has proven more resilient than expected. Although inflation has eased from its recent peaks, it still hovers above the Federal Reserve’s 2% target. Notably, the latest Consumer Price Index (CPI) data for March revealed higher-than-anticipated inflation, resulting in a 12-month price change of 3.5%.

Analyzing the key components of the CPI, we observe that the most significant price surges are associated with transportation services (including vehicle maintenance, repairs, and insurance), recreational services, and shelter.

However, if we exclude the shelter component (which carries a substantial weight of 36.2% in the index), inflation appears more moderate at 2.3%. Going forward, attention is likely to focus on rent and owners’ equivalent rent—the amount a property owner would need to pay in rent to match the cost of ownership. 

Labor market.

The robust labor market continues to support consumer demand. The unemployment rate, currently at 3.8%, has consistently stayed below 4% since early 2022. Additionally, job gains have averaged 244,000 per month over the past year. Furthermore, labor force participation—measured as the percentage of people in the workforce relative to the civilian noninstitutional population—has remained higher than pre-COVID levels for individuals aged 25 to 54 over the last 12 months.   

Income and spending.

Amid a robust labor market, employees are enjoying higher wages. Over the last 12 months, average hourly earnings for private workers have risen by 4.1%. Consequently, workers are actively contributing to the economy by spending their money. According to the latest report from the U.S. Bureau of Economic Analysis, consumer spending is currently maintaining an annualized pace of $19.2 trillion.

Emerging markets.

In recent years, geopolitical risks associated with Chinese investment have escalated. While military risk remains in the background, strategic competition and targeted decoupling risks have intensified. These risks stem from various factors, including U.S. government executive orders restricting outward investment into Chinese advanced technology, sanctions affecting Chinese tech companies, and targeted nearshoring across the global supply chain. Consequently, U.S. investors are increasingly concerned about the market environment.

However, it’s essential to recognize that emerging markets extend beyond China. While mainland China holds significant importance with an index weight of approximately 25%, other countries and regions also play crucial roles. Interestingly, despite Chinese stocks facing challenges post-COVID, other segments within the emerging world have performed relatively well. Perhaps within emerging markets, active management* will be able to add value either through reducing risk or enhancing returns in the years to come.

* Active management refers to an investment strategy where fund managers actively make decisions about which securities to buy and sell within a portfolio. In the context of international investing, active managers may also concentrate their efforts on selecting countries for investment, determining appropriate exposure levels in specific countries, and identifying countries to avoid.