Key takeaways

  • The stock market continues to gain momentum following a strong 2023.

  • The S&P 500 gained more than 10% in 2024’s first quarter, its best Q1 performance since 2019.

  • Bond markets have struggled, as interest rates trended higher to start the year.

The U.S. stock market, which delivered strong results in 2023 (up more than 26%), maintained positive momentum through most of 2024’s first quarter, with a total return of 10.2% through the end of March.1

S&P 500 daily index value change between January 1, 2022 - March 28, 2024.
Source: U.S. Bank Asset Management Group. Chart depicts daily changing values of the Standard & Poor’s 500 Index, an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.

The environment for bond investors appears to have stabilized, although total returns for bondholders are muted so far in 2024. The Federal Reserve (Fed) has indicated that its aggressive interest rate-hiking cycle is likely over, and that it may cut the short-term federal funds target rate it controls later in 2024. However, it’s not clear when the Fed might actually initiate rate cuts, adding some uncertainty to fixed income markets. Bond yields drifted higher in 2024’s opening months. The benchmark 10-year Treasury yield, which dropped below 4% in December 2023, moved back up over 4% in January 2024 and stayed above that level through March.

10-year U.S. Treasury note's yield: October 1, 2022 - March 28, 2024.
Source: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates.

Both bond and equity markets are focused on the Fed’s interest rate actions. The Fed rapidly raised its target federal funds rate from near 0% in early 2022 to 5.25% - 5.50% by mid-2023. In addition, for the first time since 2019, the Fed reduced its bond holdings. The Fed did so in pursuit of a slower economy and lower inflation. Many anticipated the Fed’s actions would tip the economy into a recession, but this hasn’t occurred.

“The economy today can best be described as resilient,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. Freedman attributes the economy’s ongoing expansion to persistent consumer activity. “Consumers have been spending more than most thought they would, and that has boosted corporate profits.”


Economy’s surprising strength

The U.S. economy grew at a 2.5% annualized pace in 2023, as measured by Gross Domestic Product (GDP),2 stronger than many expected given the headwinds created by higher interest rates. “The economy’s held up reasonably well to this point because of the strong labor market (unemployment below 4%3), and consumers’ fairly strong financial position,” says Freedman. “Our U.S. Bank economics teams believes these factors continue to help us avoid a recession in the near term.”

Even as the economy grew, inflation moderated significantly. After peaking at a rate of 9.1% in June 2022, inflation (based on the Consumer Price Index, or CPI,) stood at 3.2% for the 12-month period ended in February 2024.3

“The economy today can best be described as resilient,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “Consumers have been spending more than most thought they would, and that has boosted corporate profits.”

The Fed's rate hikes result in higher borrowing costs for consumers and businesses. That could slow economic activity by increasing borrowing costs for consumer purchases or business capital expenditures. Yet consumers remain engaged. “The strong labor market and solid wage gains have given consumers the wherewithal to maintain enough spending activity to keep the economy on track,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. Haworth says these are favorable signs that the economy, while it may slow from its solid 2023 growth pace, appears to be on a track to continue expanding in 2024. “The Federal Reserve, at its March meeting, upgraded its own projections for 2024 GDP growth,” notes Haworth. The Fed currently projects 2024 GDP growth of 2.1%, compared to its previous estimate of 1.4%.4


Where markets stand today

Much of the S&P 500’s 2023 gain of 26% can be attributed to technology-oriented stocks, though leadership broadened out to other sectors by the end of the year. “In November and December, nearly every segment of the market participated in the rally, but it did not yet signal a rotation in leadership for equities,” says Haworth. In 2024’s opening months, technology stocks are again off to a fast start, driven in large part by market enthusiasm about the prospects tied to advancements in artificial intelligence. “Below the surface of the headline numbers, there’s a fair amount of turmoil in equity markets today,” says Haworth. “In 2024, we aren’t seeing the broadening out that occurred in late 2023. Markets may be waiting for more clarity from the Fed on when rate cuts might begin.”

In the fixed income market, Haworth says there’s been increasing interest in the “credit” end of the market (non-U.S. Treasury bonds), which can carry more risk than securities issued by the U.S. government. “Investors aren’t getting as big a premium for corporate bonds, municipal bonds or mortgage-backed securities as was the case earlier, but it remains a reasonable place to invest fixed income dollars,” says Haworth.


Identifying investment opportunities

Haworth says despite the solid start to the year for stocks, investors should continue to expect a “choppy” environment, meaning prices are likely to fluctuate. Haworth recommends dollar-cost averaging as a way to effectively invest in equities. “By making regular investments over a period of time, you aren’t anchored to an investment at a single price; you stretch your investment out at different price points over time,” says Haworth. “It also gets you going on an investment plan so you can start growing your wealth now.” Given that the direction of markets is difficult to predict in the short run, this is a strategy that can help overcome concerns about investing just prior to a market dip.

Assets that are set aside to meet funding needs in the next 18 months should capitalize on today’s elevated interest rate environment by utilizing higher-yielding savings accounts, CDs and money market mutual funds.

“Be prepared to take what the capital markets offer given the current environment’s realities,” says Freedman. He recommends that long-term investors position their portfolios with a neutral mix of equities, fixed income and real assets, relative to their investment plan. Freedman adds, “It’s critical to have a financial plan that’s tied to the specific goals you hope to achieve.” With a plan in place, you can more readily identify investment strategies that align with your goals.

Based on your situation and goals, other portfolio strategies that can play a potentially contributory role in your portfolio include:

  • Slightly longer-than-average durations in municipal bonds, including an allocation to high-yield municipal bonds for tax-aware investors.
  • Taxable fixed income portfolio diversification into lower quality securities, such as collateralized loan obligations and residential mortgage securities not backed by a government agency. This should supplement allocations to U.S. Treasury securities.
  • Reinsurance as a way for trust portfolios to capture differentiated cash flow with low correlation to other portfolio factors such as market or economic trends.
  • Structured notes, which provide customized exposure to an investment asset. Downside risk can be mitigated in such a vehicle, but it also typically caps upside potential.
  • Private market investments for qualified investors who can commit dollars for an extended period to capitalize on potential opportunities that are not readily available to public capital market investors.
  • Derivative investments to help mitigate portfolio risk or to pursue more speculative positions in a portfolio.

Discuss options with your wealth management professional and be sure to understand the risks associated with each of these investments. Determine whether any can help you more effectively diversify your portfolio.

Freedman adds it’s important to regularly review your plan with your wealth management professional. Determine whether there are opportunities to rebalance your portfolio in ways that more appropriately reflect your investment objectives, time horizon, risk appetite and the current market environment.

Have questions about the economy, markets or your finances? Your U.S. Bank Wealth Management team is here to help.

Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth and SEP IRAs, 401(k) and 529 plans. Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature. Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity and the infrequent availability of independent credit ratings for private companies. Structured products are subject to market risk and/or principal loss if sold prior to maturity or if the issuer defaults on the security. Investors should request and review copies of Structured Products Pricing Supplements and Prospectuses prior to approving or directing an investment in these securities. Investments in high yield bonds offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. Derivatives can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on performance. Employing leverage may result in increased volatility. These investments are designed for investors who understand and are willing to accept these risks. Reinsurance allocations made to insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events primarily driven by weather-related and other natural catastrophes (such as hurricanes and earthquakes). These events are typically low-frequency but high-severity occurrences. In exchange for higher potential yields, investors assume the risk of a disaster during the life of their bonds, with their principal used to cover damage caused if the catastrophe is severe enough. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Diversification and asset allocation do not guarantee returns or protect against losses. Past performance is no guarantee of future results.

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  1. Source: S&P Dow Jones Indices LLC, performance as of March 26, 2024.

  2. Source: U.S. Bureau of Economic Analysis, Gross Domestic Product.

  3. Source: U.S. Bureau of Labor Statistics.

  4. Board of Governors of the Federal Reserve, “Summary of Economic Projections,” March 20, 2024.

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