This was another very good quarter for the stock market with large company stocks up 10.4%. That is historically a return for a full year. This quarter was not as kind to the bond market and real estate which were down slightly. Commodities saw a strong return of 4.2%, also much higher than normal for a quarter.
Lets drill down into different types of investments. The table below shows returns for investable ETFs representing the most common investment types. We like to use ETFs versus indices to evaluate returns as they include transaction cost and fees while indices do not. In this update we will examine the performance of each major investment type through the end of March 2024.
Stocks
Large company U.S. stocks were up substantially in the first quarter. Large cap stocks had a 10.4% return for the quarter. Technology stocks lagged for the first time in a while with a return of 8.6%. This should not be a surprise given how well technology stocks have done over the past decade (up 18.7% a year on average). They were priced for perfection going into this quarter. Value ETFs, such as VTV, lagged the overall stock market at a return of 9.6% for the quarter. As I have noted in other posts, I am not a fan of the value indices that are used by these ETFs. They primarily identify stocks that are selling cheaply and have little growth. This is not value in my mind, just cheap stocks some of which deserve to be cheap. If we look at a more actively managed value ETF such as COWZ (one of my favorites) we will see that it outperformed the SP500 (VOO or SPY) with a quarterly return of 12.2%. Over the past five years COWZ has had an average annual return of 17.8% versus 15.1% for VOO. This is also not a surprise as value had underperformed over the prior decade and was due to outperform given the low price of value stocks relative to their fundamentals and growth prospects.
International stocks had a very good quarter but lagged US stocks with a return of 5.6%. Small company stocks were similarly up 5.0%.
Bonds
The bond market overall mixed for the quarter with long and intermediate term bonds down slightly and short term and inflation protected bonds up slightly. The best low risk opportunity in bonds remain 4-to-6-month U.S. Treasury bills which are yielding about 5.3%.
Alternative Investments
Alternative investments can include real estate, commodities, private capital, and a variety of other investments. Here we include two traded ETFs representing real estate (VNQ) and commodities (DBC). Real estate was down 1.3% for the quarter while commodities were up 4.2%.
Diversified Portfolios
There are some iShares ETFS representing different levels of diversification from about 40% stocks and 60% bonds to 80% stocks and 20% bonds. Most diversified investors have portfolios with between 60% and 80% stocks depending on their ability and willingness to take risk. These diversified portfolios were all up for the quarter from about 2.2% for a 40% stock portfolio to about 6.4% for an 80% stock portfolio.
Looking Forward
Thus far the Federal Open Market Committee has managed to slow the economy down by raising interest rates without pushing the economy into a recession. Risk remains that they could keep rates high for too long or that other events might cause a U.S. or global recession. Overall stocks are also priced at a high level relative to history. I would therefore expect more modest stock returns over the remainder of this year. There is a possibility however that once the fed begins to lower rates that strong stock performance could continue. The bond yield curve (see US Treasury Yield Curve) remains inverted with the best yields available for short-term bonds. At some point there will be more attractive opportunities for intermediate term bonds, but not yet in our view.