The US economy surprisingly surged in the first quarter, largely dispelling fears that market volatility and the prolonged government shutdown would cause a recession. US 1Q GDP grew at a 3.2% pace as reported in late April, versus an expected expansion of 2.3%. Buoying this result were some one-time factors, notably rising exports and falling imports as well as a corporate build up of inventories. These lead some to conclude the economy could slow in the months ahead. Meanwhile, factors pointing to prior economic bullishness continue to show strength. Employment remains vibrant with robust job creation and low unemployment. Consumers continue to spend as retail sales rose by 1.6% in March while consumer confidence improved. Finally, the ISM manufacturing index remained in expansionary territory at 52.8. While growth remains robust, less desirable factors typically associated with growth, such as inflationary and wage pressures, remain largely absent. As such, the Federal Reserve continues to advocate a neutral stance toward interest rates. With the Fed firmly on the sidelines, and with recessionary fears diminished, financial markets have taken the opportunity to pursue more market risk. This pursuit, along with a better than expected corporate earnings environment has subsequently led to strong April returns, especially for equity market participants.
Equity markets displayed robust returns for April following reported strength in earnings and economic data. With about half of the companies in the S&P 500 reporting actual results for Q1 2019, approximately three-quarters of them have reported actual EPS coming in above estimates. Technology and consumer stocks were the dominate drivers of market returns due to consistently strong earnings and economic data showing consumer confidence and willingness to spend. The NASDAQ Index, dominated by these companies led the way for both the month and YTD. April’s rally was a broad-based however, as all equity indices participated in the rally, displaying sizable monthly gains. Stock valuation expansion continues to expand as well, with the S&P500 P/E ratio now at 17x.
Bond yields responded to potential future inflationary fears represented by continued Fed neutrality and strength in economic numbers by climbing steadily, albeit slowly, higher in April. The yield curve steepened during the month with the 10-year Treasury rate rising 10 bps to 2.50% while the 2-year remained relatively unchanged. Resulting returns on bond indices produced slight, if not negative returns, especially for longer maturities. Bucking the trend once again was the corporate sector, which mimicked the positive outlook for US companies displayed in the equity markets. Even riskier corporate debt, as represented by the high yield market, continued to provide the strongest returns in the fixed asset class with 1.40% returns for April and 8.90% for YTD.