The U.S. economy continues its tepid expansion, reflecting mixed economic data and uninspiring global growth. First-quarter weakness has become something of a trend over the last few years, with 2016 being no exception. U.S. gross domestic product grew by just 0.5% in the first quarter, hurt largely by falling corporate spending on equipment and structures against a backdrop of ongoing weakness in global demand. Despite the sluggish start, many economists are predicting growth to improve over the remainder of the year. Manufacturing-related declines that plagued the economy from late summer of last year through the first part of 2016 appear to be waning. Recent oil price increases coupled with a U.S. dollar retreat have contributed to the nascent manufacturing turnaround. U.S. light-vehicle sales made a strong comeback in April after a mixed March. The auto industry is coming off a banner 2015, driven by a sturdy labor market, low interest rates and falling gas prices. At its April meeting the Federal Reserve held interest rates steady and gave little indication it plans to raise rates in the coming months. Nevertheless, many prognosticators are still forecasting a late-year target rate increase, perhaps in November or December. With earnings season winding down, global economic concerns are likely to determine the next direction of global equity and fixed income markets.
With the exception of the technology-heavy NASDAQ (down 1.9%), U.S. large-cap indices grinded higher in April with the blue-chip Dow and the S&P 500 Index increasing 0.6% and 0.4%, respectively. Equity markets appear to have somewhat stabilized in April after a first quarter that witnessed a sizable selloff through early February, followed by a strong rebound through the end of March. The NASDAQ index was particularly pressured in April, as the three largest constituents, Apple, Google parent Alphabet, and Microsoft issued earnings reports that fell short of investor expectations. International developed -market equities made a strong push in April after a weak showing in the first three months of the year. However, shares may experience increased volatility in the coming months as the U.K. votes on whether to remain a member of the European Union.
U.S. government bonds held steady in April, while both investment- grade and high-yield corporate debt rallied. The U.S. 10- year Treasury bond finished the month yielding approximately 1.8%. Energy-related corporate bonds experienced a strong repricing on oil price increases throughout the month. Interest rates have almost ubiquitously fallen in the first four months of the year on global growth concerns and extremely accommodative policy action from the Bank of Japan and the European Central Bank. While interest rates remain exceptionally low, negative interest rates in Japan and the Eurozone may apply further downward pressure on U.S. rates in the months ahead as investor demand for the relatively superior rates of U.S. fixed-income investments intensifies.