Perspective :

First Quarter 2024 Capital Markets Perspective

< Back

Who needs rate cuts?

Equities, high yield bonds, leveraged loans, and the U.S. dollar ruled for the quarter, as investment grade bonds of all types, REITs, and other major currencies fell. Trends in economic growth and inflation continued to make life difficult for the Federal Reserve and the probability of rate cuts in the near term kept falling. The mighty American consumer increased spending on an inflation adjusted basis by 5% year-over-year in February, according to the Commerce Department, and the March jobs report came in well above expectations, with 303,000 jobs added (expectations were for 200k).

Since August of last year, the consensus estimate for 2024 GDP growth has been on the rise, according to Bloomberg, and now tops 2.2%. Financial conditions have been easing, making for a more favorable growth environment. U.S. manufacturing continues to awaken from its slump, with the S&P Global US Manufacturing PMI coming in at 52.5, above expectations, and continuing a string of increases. And higher rates haven’t yet had much of an impact on consumers’ financial conditions in general. Although credit card and auto loan delinquency rates have increased materially for younger households, those 18 to 29 and 30 to 39 years of age. Even so, the growth side of the economic picture has helped propel the stock market higher, and with that, investor sentiment. Various measures indicate that investors are as bullish as they’ve been since the start of the year.

But all is not upbeat. While the U.S. Commerce Department reported that the index of personal-consumption expenditures, the Fed’s preferred indicator of inflation, rose a relatively modest 2.5% in the 12 months through February, the consensus estimate for 2024 CPI has steadily increased over the past year and now sits at 2.9%. And digging into the details of the Commerce Department’s report gave pause, as the index ex-food and energy climbed by 3.5% on an annualized basis in the three months through February, up from around 2% late last year. JPMorgan estimates that ex-food and energy, inflation across developed countries has moved upward from 3% in the second half of last year to 3.5%.

The probability of a June rate cut has now fallen from 72% a month ago to 57% currently. If part of the rationale for an ever-increasing stock market has been the expectation of multiple rate cuts, then logically, as those cuts get pushed out and down, that narrative loses its appeal.

 What happened in the markets during the quarter?


Japanese equities continued their strong performance, ending the quarter with a gain of just over 4% in March, bringing the trailing three-month return to 19.2% and besting all developed markets in local currency terms. And international developed stocks as a group performed well, adding almost 10% in local currency terms, but the U.S. dollar’s surge wiped out a healthy portion of that gain for U.S.-based investors, resulting in a return of about 6%. On a relative basis, international stocks keep getting cheaper compared to U.S. equities. JPMorgan’s quarterly Guide to the Markets shows that they are at a two standard deviation low, the lowest in at least two decades, which is extreme even after accounting for the industry weighting differences. That cheapness has caught the attention of hedge funds which are now the most exposed they have ever been to European stocks relative to a global benchmark, according to Goldman Sachs Group Inc.

Here in the U.S., we experienced more of the same, with large growth stocks leading the way. Although, while the Mag-7 continued to get much of the attention, the trend is losing a bit of steam, leading to yet another less than catch phrase – the Fab Four – which will also tire quickly. Actually, five of those seven companies outperformed the whopping 10.6% return of the S&P 500® in the first quarter, the other 493 names managed a 6% gain. And small caps, both here and abroad, as well as emerging market equities, all posted returns of around 2.4%, which normally would be considered a solid quarter.

Market breadth has been much better of late, and implied correlations among U.S. stocks are the lowest in at least a decade, which theoretically is good for active management.


Credit spreads continued to narrow throughout the quarter across sectors and geography. Investment grade corporate spreads came in by 11 basis points (bps) and high yield spreads fell by 27 bps. And yields rose along the curve from 3-months to 30-years. All of which helps explain why investment grade debt, from corporates (-0.4%) to long-term Treasuries (-3.0%) fell, while junkier credits, i.e. high yield (+1.5%) and leveraged loans (+2%), advanced.

While rate cuts continue to be pushed down and out, many if not most of the managers that we partner with have been extending duration. Signaling a belief that while rates may not fall soon, their rise has ended.

Well, at least in the U.S. that is. In March, Japan raised rates for the first time in 17 years, taking their equivalent of the Fed Funds rate to 0%, and with that, the era of negative interest rates came to a close. Around the end of 2013, the total value of negative yielding debt globally was about zero. By early 2021 that number reached approximately $18 trillion and has now completed the round trip back to zero, according to FactSet. That thing that wasn’t supposed to be possible sure lasted a long time.


A third year of supply deficits thanks to both severe rains and drought in West Africa, along with hedging strategies that failed due to sharply rising prices, all led to a 147% gain for cocoa futures during the first three months of the year. Chocolate lovers everywhere are no doubt bracing for the impact on their favorite sweet treat.

Elsewhere, commodities behaved a bit more normally, with notable gains notched for WTI (+18%) and Brent crude oil (+16%) on production cuts, continued strength in the U.S. economy, signs of a possible bottoming of economic activity in China, and heightened geopolitical tensions in the middle east. The gains for the energy complex as a whole were tempered by a 29% decline in natural gas futures.

Rounding out the group, precious metals fared well, with gold advancing by 7.4% and silver gaining 3.8%, while agricultural contracts lost ground as wheat, corn, and soybeans all fell.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, ETF, Multi-Asset Income, and Faith-Based Strategies, and the additional difficulties of properly conveying how those asset allocation changes flow through to trade level activity, we are instead directing clients to our monthly trade summaries, which describe in detail what trade activity occurred by strategy, and why.

Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we favor U.S. small caps, emerging market equities, managed futures, floating rate loans, and cash/short term bonds. We are generally underweight U.S. and international large cap stocks, REITs, commodities, and both high-yield and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur. At the beginning of March, there were no material changes to our asset allocations.

Return expectations for emerging market equities and international small caps continue to remain near the tops of their respective 20-year ranges. Expectations for TIPS, managed futures, and T-bills are likewise high relative to history. U.S. large caps remain near their 20-year lows, as do REITs and commodities, and leveraged loan return expectations while still attractive, have moved lower from a year ago.


For the quarter, the biggest positive contributor on a relative basis was our managed futures exposure. While there was wide dispersion across the four funds that we utilize, all of them posted positive returns and greatly outperformed long-term Treasuries and high-quality bonds, which are the other asset classes that we use to hedge equity risk. Leveraged loans were also a bright spot compared to other fixed income categories and generated a solidly positive return. Beyond that, our equity positioning generally worked against us, as emerging markets, and both U.S. and international small caps, underperformed global large cap stocks. International exposure in general was also hurt by a surging U.S. dollar. Case in point, Japanese equities were up about 19% for the quarter, but as the Yen fell, the return to U.S. investors was a more modest 11%. And finally, our underweight to REITs was clearly beneficial, as they ended the quarter in the red.

Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains, and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any type of securities, and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees, and expenses. Frontier may modify its process, opinions, and assumptions at any time without notice as data is analyzed.

Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third-party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.

Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions, and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries, or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment, or tax advice. Frontier does not directly use economic data as a part of its investment process.

Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.

In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.

Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

© Morningstar 2024. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted, or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third-party investable instruments (if any) based on that index.

Frontier Asset Management, LLC is a Registered Investment Advisor. Frontier’s ADV Brochure and Form CRS are available at no charge by request at or 307.673.5675 and are available on our website They contain important disclosures and should be read carefully.

U.S. Large Cap Equity S&P 500 Represents US large company stocks.
U.S. Small Cap Equity Russell 2000 A small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
U.S. Small Cap Equity S&P 600 A stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
International Equity MSCI EAFE An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
Japanese Equity MSCI Japan Designed to measure the performance of the large and mid cap segments of the Japanese market.
Emerging Market Equity MSCI Emerging Markets Captures large and mid cap representation across 24 Emerging Markets (EM) countries.
Investment Grade Corporates Morningstar US Corporate Bond Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities greater than one year.
High Yield Bonds Morningstar U.S. High Yield Bonds Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted.
TIPS Morningstar US TIPS Represents inflation-protected securities issued by the U.S. Treasury.
Leveraged Loans S&P / LSTA U.S. Leveraged Loan 100 Designed to reflect the performance of the largest facilities in the leveraged loan market.
Municipal Bonds Morningstar US Municipal Bond Measures the performance of fixed-rate, investment-grade USD denominated tax-exempt debt issued by U.S. state, U.S territory, and local government entities with maturities greater than one year.
Long-Term Treasuries Morningstar US 10+ Yr Treasury Bond Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years.
REITS FTSE NAREIT Equity REIT A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
Commodities Bloomberg Commodity Broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.


Related Content

Blogs & Articles