Stocks continued their advance this month as the March 20 meeting of the Federal Open Market Committee further affirmed interest-rate cuts were forthcoming. The affirmation was evidenced in the committee’s updated Summary of Economic Projections, including the dot plot of members’ rate projections, and by Fed Chair Jerome Powell’s comments.
The S&P 500® Index gained 3.22% during the month, helped by a modest drop in interest rates that allowed bonds to post their first monthly gain of the year, with the Bloomberg US Aggre-gate Bond Index advancing 0.92%. The S&P 500 ended the month at a record high, its 22nd of the year.
For the quarter, the S&P 500 gained 10.56%, its best start to a year since 2019 and its second consecutive quarterly gain exceeding 10%, something that has happened only eight times since WWII.
Results
For a second straight month, all 11 sectors that compose the S&P 500 Index posted gains during March, led by the Energy sector, which rose 10.60% as West Texas Intermediate (WTI) crude oil gained 4.02% during the month to settle at $82.41—the first time it closed above $80 a barrel since November 2023. Gasoline also rose from $3.82 to $3.97 a gallon during the month. Prices were affected by OPEC+ production cuts, reduced U.S. rig count, and Russian attacks on Ukraine energy infrastructure.
In somewhat of an unusual twist, Utilities followed with a gain of 6.62%. The sector’s 3.40% dividend yield began to look more attractive with interest-rate cuts on the horizon and higher revenues expected from the increase in AI applications that require significant amounts of electricity.
The laggard for the month was the Consumer Discretionary sector, which eked out a gain of just 0.10%. The sector was negatively affected by a 12.92% loss for Tesla, which was hurt by price cuts on two of its models and fears that production targets for the company are too aggressive.
For the quarter, the leaders were Communication Services at +15.82% and Energy at +13.69%. The Communication Services sector was helped by a 37.33% gain for Meta Platforms, which contributed 55% of the overall sector gain.
Only one sector posted a loss for the quarter, with Real Estate at -0.55%. The bond surrogate’s return closely mirrored the 0.78% loss of the Bloomberg US Aggregate Bond Index during the quarter and continues to be bogged down by downward pressure in commercial real estate values, particularly office properties.
“Risk on” was generally the dominant theme during March as the Russell 2000® Index of small-cap stocks returned 3.58% compared with the 3.21% return of the Russell 1000® Index of large-cap stocks, and the highest-beta quintile of the S&P 500 beat the lowest-beta quintile by 356 basis points. The only “risk” laggards during the month were low-quality stocks within the S&P 1500® Index (those rated B or lower by Standard & Poor’s), which returned 2.67% versus the 3.88% return of high-quality stocks (B+ or higher).
“Risk on” generally carried the quarter as well, as low quality beat high quality (16.96% vs. 6.61%) and high beta beat low beta by 16.61%. But large-cap stocks were able to maintain their lead over small-cap stocks as the Russell 1000 Index gained 10.30% com-pared with the 5.18% return of the Russell 2000 Index.
Returns broadened in March with the S&P 500 Equal Weight Index (4.46%) outpacing its cap-weighted counterpart and the S&P 493 beating the “Magnificent Seven” (3.61% vs. 2.26%). The broadening of returns helped value beat growth, with the Russell 1000 Value Index outperforming the Russell 1000 Growth Index, 5.00% to 1.76%; the Russell Midcap® Value Index ahead of the Russell Midcap Growth Index by 279 basis points (5.18% to 2.39%); and the Russell 2000 Value Index gaining 4.38% compared with the 2.80% return of the Russell 2000 Growth Index. The average outperformance of 2.53% for value versus growth across the three market capitalization ranges was the largest since October 2022.
For the quarter, growth maintained its lead over value with the Russell 1000 Growth Index returning 11.41% compared with the 8.99% return of the Russell 1000 Value Index; the Russell Midcap Growth Index gaining 9.50% to the 8.23% posted by the Russell Midcap Value Index; and the Russell 2000 Growth Index advancing 7.58% compared with the 2.90% return of the Russell 2000 Value Index. The Russell 2000 Growth Index was greatly helped by the technology sector, which gained 81.87%, aided by the 255.32% return of one stock, Super Micro Computer.
Returns for developed market international stocks and emerging market stocks were mixed in March. The MSCI EAFE Index of devel-oped market stocks outpaced the S&P 500 Index in both local currency and U.S. dollar terms (4.12% and 3.40%, respectively), but the MSCI Emerging Markets Index fell short of the S&P 500 Index (3.06% local; 2.52% USD).
During the quarter, both international benchmarks lagged the S&P 500 Index in local currencies, with the MSCI EAFE Index returning 10.10% and the MSCI Emerging Markets Index at 4.57%. Returns were lower in dollar terms (EAFE: 5.93%; EM: 2.44%) as the dollar gained 3.17% versus a currency basket comprised of the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona, and 0.94% versus the MSCI Emerging Markets Currency Index. The MSCI Emerging Markets Index continues to be negatively affected by losses in China, which dropped by 1.71% in yuan and 2.19% in dollars during the three-month period.
Looking ahead
Both the fundamental and seasonal/technical backdrops for stocks remain encouraging, at least in the near-to-intermediate term, with earnings growth for the S&P 500 Index expected to accelerate from 3.4% in Q1 ’24 to 17.2% by the fourth quarter according to FactSet.
As for the seasonal backdrop, since WWII, April has been the second-best month for returns during the year for the S&P 500, showing gains more than 70% of the time with an average return of 1.56%. Only December has produced better results.
Speaking technically:
- Since WWII, when the S&P 500 has produced positive gains for five consecutive months, it has gone on to produce positive returns 82.8% of the time over the next 6 months and 92.9% of the time over the next 12 months, with gains averaging 6.2% and 12.5% respectively.
- When Q1 returns for the S&P 500 have exceeded 10%, returns were positive for the remainder of the year 95% of the time, with an average gain of 9.8%.
- In the prior seven instances when the S&P 500 Index produced back-to-back quarterly gains that ex-ceeded 10%, the index generated additional gains six times over the next 12 months, with an average gain of +12.27%.
Besides geopolitical and inflation/interest-rate risk, the “only” remaining flies in the ointment for stocks appear to be valuations and investor sentiment, both of which remain at elevated levels. The S&P 500 is trading at a forward price/earnings multiple of 20.95X versus a 30-year average of 16.47X. The CBOE Volatility Index (VIX) is at 13.01 versus its 30-year average of 20. The American Asso-ciation of Individual Investors (AAII) bull/bear spread is at its highest level since last November. The National Association of Active Investment Managers (NAAIM) exposure to U.S. equity markets is at its highest reading since 2021. And at 0.57%, the S&P 500 equity risk premium is in the lowest decile of observations over the last 30 years.
Seems like a setup for a bull/bear “steel-cage death match” and the winner takes all!
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