March was another positive month for markets, continuing the rally to start the year. Improving corporate fundamentals and a supportive economic backdrop drove solid single-digit returns for U.S. markets during the month. This capped off a strong quarter for U.S. stocks, an encouraging sign that the economic and market momentum from 2023 has carried over into 2024. While stocks performed well during the month and quarter, fixed income was a bit more mixed. Investment-grade bonds were up in March but ended modestly down for the quarter due to rising interest rates. High-yield bonds, typically less driven by interest rate movements, ended both March and the quarter in positive territory.
Looking Back
Strong economic growth. U.S. stocks benefited from stronger-than-expected economic growth at the end of last year and the start of this year. GDP growth came in above economist estimates in the fourth quarter, and we saw solid job growth and consumer spending to start 2024. More than 500,000 jobs were added between January and February, which was strong on a historical basis and above economist estimates.
High inflation. The economic growth in the first quarter was largely positive, but it also caused inflation to remain stubbornly high. While there were modest improvements in getting year-over-year inflation down in 2024, both headline and core inflation remained above the Fed’s 2 percent target, and the pace of improvement slowed. This result caused investors to reassess their expectations for monetary policy going forward, contributing to the rising interest rates we saw during the quarter.
Looking Ahead
A shift in market expectations. Given the impressive economic resilience and still-high inflation we saw in the first quarter, markets have adjusted their Fed expectations for the rest of the year. We started the year with futures markets pricing in six interest rate cuts by the end of 2024; we ended March with futures markets calling for just three interest rate cuts by the end of the year, which is in line with Fed guidance. This adjustment helped explain the rising rates we saw during the quarter and may lower the risk of Fed-driven volatility for the rest of the year.
