Markets finished the quarter on the same low volatility high return note that we have enjoyed so far this year, brushing off weak data and seeing the positive in the latest inflation and economic data. To put this in context most diversified portfolios have delivered the kind of returns we might have expected for the whole year in just the first three months of 2024. Geographically, Japan was the standout performer for both the week and the entire quarter. Europe showed little volatility, while the US delivered the best returns but with considerably higher volatility, especially among large cap tech stocks.

What had been a very narrow market, dominated by the so-called 'Magnificent 7', has broadened out so far year, with Europe and Japan  keeping pace with the Nasdaq early in the quarter and emerging markets, Australia, and the UK joining the party in the last 4 weeks. The Nasdaq has lagged slightly in March due to valuation concerns surrounding the largest tech giants. Long term bond yields have traded in a range between 4% and 4.3% or but hope of lower short-term rates later this year have been consistently pushed out leading to choppy returns from bonds.  This seems set to continue with Australian CPI data last week confirming the global trend of stubborn services inflation offset by goods deflation. Then in the US, the highly anticipated  Personal Consumption Expenditure Index for February came out last Friday and came in in-line  with expectations of 0.3%. We discuss this in more detail in this week's Weekly video with Christian Bayliss of Fortlake Asset Management but in short this again paints a picture of slightly higher for longer inflation and central banks being in less of a hurry to bring rates down. This, along with some more strong industrial activity and inflation data overnight, has pushed yields in the US up to the top of that narrow range again.

For investors this low volatility environment where much of the Goldilocks/Soft Landing scenario seem priced in raises the questions whether it is a sign of market complacency or increasingly solid fundamentals. If we look again at how active vs passive multi-asset portfolios have performed it appears that active managers are taking a more defensive approach, possibly leaving some gains on the table if the Goldilocks scenario persists but potentially protecting against uncertainty ahead. More specifically it appears that most active allocators are underweight duration (especially in defensive portfolios) and the US (particularly for growth biased portfolios). This playbook worked will in 2022 but most commentators seem to agree that the next few months could be difficult to predict. For advisers there is a choice to be made about whether one is advocating a cautious approach in relative or absolute terms. It seems like active asset allocators are leaning to the latter.

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