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.
Global Economy:
There was a sigh of relief from investors in April following the first round of elections in France and the announcement of the upcoming election in the United Kingdom (UK). The likelihood of a moderate president in France and a less-divided House of Lords during Brexit negotiations led to decreased expectations of turmoil in the European Union (EU), and consequently increased the market’s overall appetite for risk. All is not entirely calm on the global front, however, with President Trump responding strongly to Syria’s use of chemical weapons against civilians, and North Korea’s continuing missile tests. While slow in its response, there are indicators that China may be willing to exert its influence to help bring some stabilization to the North Korea threat.
In the US, President Trump revealed the outline of his tax plan, with simplified tax brackets and limited deductions. It is too soon to know specific details and the impact on investments but the early plan signals the general direction. Health insurance reform is still active, but building consensus is proving difficult.
The Commerce Department’s initial read on 1Q-17 real gross domestic product (GDP) came in lower than expected at just 0.7%. Most signs point to this being a pause on the road to higher growth as consumption is expected to accelerate for the remainder of the year. In addition, an increase in business investment in the first quarter bodes well. The Institute for Supply Management (ISM) manufacturing index came in at 54.8 for April. Although this reading was below March’s level, and below consensus expectations, it remains above the benchmark of 50, indicating economic expansion for the 8th straight month. The ISM new orders index creates some concern, as it dropped from 64.5 in March to 57.5 in April.
Domestic inflation remained in check, with both headline and core CPI coming in below estimates. Eurozone, inflation jumped from 0.7% in March to 1.2% in April, leading some to call for policy action from the European Central Bank (ECB).
The April jobs report was strong, with nonfarm payrolls showing 211,000 jobs added. The unemployment rate dropped to 4.4%, a ten-year low. This aligns with the Federal Reserve’s view that softness shown in March was transitory.
Global Markets:
US stocks continued their advance in April with strong results in both the large and small cap markets. While political progress focused on pro-growth policies remains quite partisan and slow, Congress was able to avoid a government shutdown with a last minute agreement on a spending resolution. Also, judging from the public companies that have reported thus far, 1Q-17 financial results have generally met or exceeded consensus analyst estimates, with both revenue and earnings per share (EPS) figures producing upside surprises at a rate not seen since 2011.
The S&P 500 returned 1.0% in April, bringing the year-to-date (YTD) advance to 7.2%. Large cap stocks were strong across the board, with nine of the eleven S&P 500 sectors gaining, led by Information Technology and Consumer Discretionary (both +2.4%) following their strong March. Small cap stocks outperformed large cap stocks for the month, with the Russell 2000 returning 1.1%. However, this sub-set of the domestic market still lags YTD, and faces higher valuations relative to its own history. Energy was a notable exception to otherwise strong performance across small cap sectors, down nearly 10%. Growth continued its recent advantage over value across all market caps.
Global equities continued to provide investors with solid gains as the political atmosphere settled a bit, economic data continued to be supportive, the US Dollar (USD) again weakened, and valuations remained relatively attractive. The MSCI ACWI index climbed 1.6% and added to a YTD gain of 8.8%. The MSCI EAFE index of non-US developed markets advanced 2.6%. The MSCI Europe index increased another impressive 3.7%, as the Eurozone flash composite Purchasing Managers’ Index (PMI) rose to its highest level in six years. Japanese stocks reversed March performance with a gain of 1.1%. Investors were rewarded for moving into higher risk equities in April, with the MSCI EAFE Small Cap returning 4.3% and Emerging Markets gaining 2.2%
The Bloomberg Commodities index was down again in April, with the 2.5% decline in oil overwhelming the 1.7% gain in gold.
Global bonds generated solid gains, as investors responded to waning exuberance around the reflation trade and an uptick in geopolitical risk. The Bloombar Global Aggregate index advanced 1.1%, leaving this broad index up 2.9% YTD. With the release of Federal Reserve minutes in early April, the market became increasingly certain that the next rate hike will take place in June, even as the pacing of monetary policy adjustments in the US is expected to remain “gradual”. This environment allowed the US Treasury (UST) complex to return 0.7% in April. Remarkably, the two-year UST yield settled at 1.26% for the third consecutive month, while 10-year UST yields were more volatile and ultimately declined 11 basis points (bps) to finish at 2.28%. The Bloombar US Aggregate index provided modest duration-adjusted excess return, advancing 0.8%. The Bloombar US Corporate Investment Grade index added almost 1.1%, as corporate credit spreads resumed the tightening trend that has characterized most of the past 15-months. With total returns of 1.2% in April, the Bloombar US Corporate High Yield index provided meaningful excess returns versus UST. Rate-sensitive BB-rated issues led the lower-quality CCC’s that have recently posted outsized returns.
Unhedged developed international bonds delivered more robust gains given the positive impact of currency translation for US-based investors. The first round of the French presidential election diminished the threat of a forced referendum on European Union membership, causing French 10-year yields to fall from 0.97% to 0.84%. Benchmark German rates were relatively steady, but sovereign yields retreated in other markets such as Italy, the UK, and Japan. The ECB took no action at its April meeting, however, it did acknowledge rising inflation and progress in various economic measures.
Emerging market (EM) bonds extended their impressive YTD rally, driven by the attractiveness of higher interest rates offered versus developed market bonds and steady/improving economic fundamentals. The USD sovereign JPMorgan EMBI Global Diversified index rose 1.5%, while local currency denominated EM bonds within the JPMorgan GBI-EM Global Diversified index returned 1.2% for the month despite the modest weakening of the Mexican Peso and Brazilian Real.
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. HighTower/GFP 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. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.