First quarter real GDP growth came in at a respectable 2.3%, easing slightly from the robust growth experienced throughout 2017. Markets have experienced heightened volatility so far in 2018 compared to 2017. Geopolitical headlines continue to play a significant role in perceived risk, with particular focus on tariff negotiations with China and tensions in Syria. Despite market volatility, economic readings continue to support a healthy expansion. The consumer remains confident with the US consumer confidence reading exceeding analysts expectations in April, rebounding from a slight decline in March. The Department of Labor’s initial jobless claims report came in at 209,000, marking the longest sub-300,000 recording since 1967. Meanwhile, the unemployment rate held steady at 4.1% for the sixth consecutive month. The manufacturing side of the economy continues to perform well. The Institute for Supply Management’s Purchasing Managers Index registered at 57.4 for April, slightly missing expectations, but remaining firmly in expansionary territory. Oil surged 2.9% in March, reaching slightly over $68 (WTI) per barrel for the first time since late 2014. The Trump-inspired Tax Cuts and Jobs Act is beginning to take effect. According to Bloomberg, 180 companies in the S&P 500 Index that have reported first-quarter earnings have seen their effective tax rate drop by an average of 6%.
So far, companies have reported strong first-quarter earnings, indicative of an economy that continues to build momentum. U.S. equities posted reasonable, although somewhat meager returns in April. Investor fervor for “growth” stocks appears intact, as the technology-laden NASDAQ Index remains by far the best performing domestic index year-to-date. Investors also appear to be favoring companies less exposed to geopolitical concerns and tariff issues. As such, small-capitalization stocks (Russell 2000) posted a relatively strong April, while the Dow Jones Industrial Average is trailing year-to-date. Internationally, worries of a Eurozone economic slowdown eased in April, resulting in a rebound in the MSCI EAFE Index.
Longer-term rates moved up during the month, reversing March price gains and resulting in losses across most of the bond market. The yield on the 10-year Treasury hit 3.00% for the first time since 2014, before falling to end the month at 2.95%. High-yield corporate bonds were the lone bright spot in April, with spreads holding steady, while investment-grade corporate bond spreads generally widened. Increasing inflation expectations may be starting to emerge as investors grapple with low unemployment, increasing wages, and rising commodity prices. The Federal Reserve lifted its economic growth projections for 2018 and 2019, and forecasts now call for at least two more rate hikes for the balance of 2018.