Key Takeaways

• The first quarter was a continuation of late 2023, characterized by stronger-than-anticipated growth paired with tamer inflation and restrictive monetary policy.
• Markets and risk assets welcomed this environment, evidenced by a strong start for equities and tighter credit spreads.
• Rising rates, however, offset the decline in spreads, resulting in a moderate rise in yields that acted as a headwind for higher-quality fixed income.
• The U.S. Manufacturing Purchasing Managers Index (PMI) returned to expansionary territory while the services (non- manufacturing) PMI remained above 50, both supportive indicators for growth.
• The last mile of inflation fighting is proving to be the hardest to combat with stickier (housing, wages, auto insurance) and more volatile (commodities, food) elements contributing to higher for longer levels.
• The labor market continues to be on solid footing with a sub-4% unemployment rate. Wage growth remains positive but the rate of change has fallen from peak, supporting lower inflation.
• U.S. large-cap stocks again led markets higher, although market breadth shows some signs of broadening. The magnificent seven has turned into the fab four and ~40% of constituents have outperformed the index YTD.
• The S&P 500 Index is historically concentrated with ~one-third contained within the top 10 holdings. Notably, top names have been disproportionate positive contributors to EPS growth.
• International equity markets were positive but lagged U.S. counterparts. Although more compelling valuations offered some support, disappointing growth, and renewed USD strength weighed on relative results.
• There was a modestly negative start to the year for investment grade fixed income as yields rose. Despite frustrating recent results, higher quality yields and duration are important elements to maintain in diversified portfolios.
• Private real estate activity is thawing contributing to renewed price An uptick in activity could lead to volatility in the short run but bring back the potential for price appreciation, in addition to yield, in the future.
• Private credit strategies maintain elevated yields reflective of higher base rates and still attractive Increased competition for loans paired with the potential for credit stress could serve as headwinds in 2024 and beyond.
• Equity market valuations leave little room for error while fixed income valuations are more Paired with expectations for a benign economic environment, risk assets appear vulnerable to negative surprises.