Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Uncertainty over trade continues, with no clear direction. There has been an extension of the exemption on aluminum and steel tariffs for “friends” until June 1st, and the future of the North American Free Trade Agreement (NAFTA) is still up in the air. Talks continue with China, but there has been no measurable progress. On a positive note, North Korea has shown a willingness to embrace peace, with a new accord with South Korea and a willingness for discussions with the US.
The Federal Open Market Committee (FOMC) met during the first two days of May, but unanimously voted not to increase rates. Expectations are for another 25 bps hike at the June meeting, and implied rates are now projecting a >50% change of at least three more adjustments by year-end. The official statement commented on the strengthening labor market and moderate economic activity. Core PCE, the FOMC’s preferred measure of inflation, has risen 1.9% over the past 12-months. This is just below the 2.0% target, but the first quarter’s rate was 2.5% on an annualized basis.
The initial release of 1Q-18 GDP beat expectations at 2.3%. The full effects of the stimulus package of December 2017, have not yet been felt, but the expectations are for the quarterly growth to be near 3% for the remainder of the year.
The unemployment rate dropped to 3.9%, after being at 4.1% for six consecutive months, fueling additional concerns of an overheating economy. This was not unexpected, as the FOMC had projected unemployment to continue to dip. Wages are still in check, with an increase of 2.6% year-over-year, slightly below expectations.
In China, the measure of manufacturing by Caixin-Market was slightly above expectations in April at 51.1, but only moderately expansionary. On a somewhat related note, the service Purchasing Managers Index (PMI) rose to 52.9, showing strength and reflecting an increased focus in this area.
The majority of risk assets produced positive total returns during April, with developed international markets leading the way. Large domestic stocks, as represented by the S&P 500, were up 0.4% for the month, but this was not enough to pull the asset class out of negative territory on a year-to-date basis. Energy was far and away the top sector at +9.3%, while Consumer Staples brought up the rear, down -4.5%. Strength was also shown in Consumer Discretionary and Utilities at +2.3% and +2.1%, respectively.
More domestically-oriented small cap stocks continued to perform slightly better amid trade uncertainties, with the Russell 2000 index up +0.9%. Value was significantly more in favor, up +1.7%, while growth was up +0.1%. The small cap universe is up for the year at +0.8%, with growth focused stocks leading the way at +2.4%.
In the broad international developed markets, the MSCI EAFE index was up +2.4% in April. Among the various regions, Pacific Ex Japan was up +3.1%, and the Eurozone was up +2.9%. Developing economies were down for the month (-0.4%), but the MSCI Emerging Markets index remains positive with a year-to-date return of +1.0%. Currency markets fluctuated with the perceived impact of protectionist measures, and the US dollar ultimately ended the month slightly stronger.
Real estate remained positive in April, as the category’s income levels continued to offer excess value versus long-term interest rates. The FTSE EPRA/NAREIT Developed index advanced +2.1%, while the FTSE NAREIT US Real Estate index gained +0.6%.
The Alerian MLP index skyrocketed (+8.1%) in March and is now down just -3.9% year-to-date. The Bloomberg Commodity index was up +2.6% for the month as oil neared $70 per barrel, and this broad benchmark now leads the way among major asset classes.
The US Treasury (UST) market experienced its third monthly decline since the beginning of the year. Front-end rates continued to grind higher with anticipated monetary policy action, and longer-dated issues gave back much of the prior month’s gain (20+ year index down -2.0%). After briefly surpassing the psychologically relevant 3% threshold for the first time since December 2013, the 10-year UST yield ended the month at 2.95%. The yield curve continued to flatten, and with the futures market still pricing somewhat below the Fed’s policy projections in 2019 and 2020, the potential exists for ongoing headwinds to UST performance.
The Bloombar US Aggregate index returned -0.7% in April, pushing year-to-date losses to -2.2%. As credit spreads recovered slightly, each of the primary market’s key sectors outperformed government issues on a duration-matched basis. IG corporate credit spreads were 1 bps tighter, but overall yields for IG corporates now exceed 3.9%.
The Bloombar 1-15-Year Municipal index returned -0.3%, as tax-exempt issues outperformed taxable counterparts. Retail fund flows were mostly negative during the month, but the concentration in short-term funds suggests seasonal tax selling rather than negative sentiment. While valuations are not excessively cheap following April’s outcome, the 10-year municipal/UST ratio declined to ~85%, this category has historically done well as yields rise given the growing tax benefit.
The Bloombar US Corporate High Yield index recovered +0.7% in April. The benchmark’s overall spread tightened by 16 bps, but the steepening of the credit curve (CCC vs. BB expanding) is notable as the credit cycle ages. Unhedged international government bonds, including local currency emerging market debt (-3.0%), struggled with the impact of a stronger US dollar, even as their yields remain more stable with monetary policy normalization that lags the US.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.