Why Q1 Was a Triumph for Optimists

Insights into important market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer

Dan Kemp 2 April, 2024 | 10:12AM
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The first quarter of 2024 was a triumph for optimists. Investors finished the quarter in high spirits after a 10.24% rise in the Morningstar US Market Index. Smaller companies lagged their larger peers, with the US Small-Mid Cap Index rising 8.09%.

International markets were noticeably more subdued, with the Developed Markets ex-US Index up 5.22% and the Emerging Markets Index up 2.07%. While some of their relative weakness can be attributed to the strength of the US dollar, the key driver of higher prices in US markets is the ongoing optimism for large technology companies, illustrated by the US Technology Index rising 13.07% over the quarter.

The Week Ahead

This week is dominated by speeches from Federal Reserve officials, including chair Jerome Powell, and it ends with the closely watched jobs report on Friday. Any of these events could pose a challenge to the current consensus and create volatility in asset prices. However, it is worth remembering that volatility is not always the start of a momentum reversal!

Inflation Data Supports Fed Cut Expectations

Investors in technology companies were buoyed at the end of last week by benign inflation data (represented by Personal Consumer Expenditures). Despite being a little higher than the January result, inflation remains in line with investor expectations and supports the market consensus of favorable economic conditions for technology companies. Companies that can grow their profits at a high rate for a long period are more sensitive to interest rates, which can be thought of as the price of time. Expectations of lower interest rates therefore support higher valuations.

Investors Tempted by Short-Term Thinking

The alignment of stock price movements, economic data, and expectations can create momentum independent of the evolving characteristics of the underlying companies. Eventually, this momentum will subside and prices can move sharply in the other direction. However, a focus on price movement encourages short-term thinking from investors, resulting in behavioral challenges that can derail their success. Morningstar behavioural researcher Samantha Lamas highlighted some of the challenges of portfolio changes in this great article.

Seeking Diversification to Reduce Volatility

Rather than timing the market, it’s better to seek diversified forms of return that can reduce the overall volatility in your portfolio and help maintain a longer-term perspective. For those who want to maintain their exposure to equities, Morningstar’s chief US strategist Dave Sekera highlights the opportunities in smaller companies and those with less exciting long-term growth prospects in his latest market outlook.


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from Dan Kemp

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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