EWM Macro View-April 2017

Post On May 5, 2017 by

Domestic equity markets rebounded from a weak March, posting a relatively strong April. Although the headlines continue to be overshadowed by legislative and other news from Washington, D.C., first quarter corporate earnings are dominating the markets. With nearly two-thirds of the S&P 500 having reported (by market cap), earnings per share (EPS) is on pace to rise by more than 15% over the same period as last year. The first quarter of 2016 was particularly weak for earnings growth, making for some easy comparisons for this quarter. But the rebound in the second and third quarters of 2016 will make the next two quarters’ comparisons more difficult. This is particularly true in the Energy sector, as crude oil has risen from the low $30s in early 2016 to the low $50s for most of this year’s first quarter. First quarter gross domestic product (GDP) came in below expectations, at just 0.7%, but the FOMC bolstered the market somewhat in its meeting this week, calling the weak report “transitory” and noting solid job growth and good fundamentals underpinning consumer spending. The April jobs report, with 211,000 new jobs added and unemployment (U-3) falling to 4.4%, further substantiated this position. The strong report creates a high probability of a hike in the Federal Funds rate in June.

Within this context, domestic equities were mostly higher during the month. The S&P 500 gained +1.03%, the Russell 1000 gained 1.06%, and the Russell 2000 finished the month up 1.10%. This performance was heavily tilted toward growth-oriented stocks, however, as the Russell 1000 Value Index was actually down 19 basis points in April, and the Russell 2000 Value was up just 39 basis points. The Nasdaq Composite Index rose by +2.3%, breaking through the 6,000 level for the first time. The top-performing sectors in the month were Information Technology, Consumer Discretionary, and Industrials, while Telecommunication Services and Energy sharply underperformed. Commodities had a very rough month, particularly anything related to Energy or Industrial Metals. REITs continued to move sideways: the Dow Jones U.S. Select REIT Index was down 24 basis points in April, after being down 27 basis points in the first quarter.

International equity markets continued their strong year in April, with most markets outperforming US equities. The MSCI World ex-U.S. Index posted a return of +2.13% for the month, led by France (+5.35%) and Spain (+4.55%). Similarly, the MSCI Emerging Markets Index posted a gain of +2.19% for the month, with strength in Europe and Asia offsetting weakness in Latin America. The Euro and most European currencies rallied against the dollar during April as concerns over the French election faded and economic growth continued to improve across the trading bloc. The dollar strengthened against most Latin American currencies, as the region continues to struggle economically, and against the South Korean Won, as that country works through both the removal of its President in a corruption scandal and increased tensions with North Korea.

Fixed income markets rallied globally in April, after mixed results in March. The U.S. Treasury curve continued to flatten, as short yields rose modestly out to two years, while those on maturities greater than 3 years fell 5 to 12 basis points. The 2/10 differential fell 12 basis points in April to 1.01%, after falling 10 basis points in the first quarter, and the 2/30 differential fell 7 basis points to 1.68, after falling the same 7 basis points in the first quarter. Of note, the yield curve continues to steepen in the back end, as 30-year yields fell 5 basis points less than the 10-year yield. The Bloomberg Barclays U.S. Aggregate Bond Index posted its best monthly gain since last June, up 77 basis points, led by strong returns in corporate bonds. Non-investment grade bonds continued to rally, as the Bloomberg Barclays U.S. Corporate High Yield Index was up 1.15%, and the S&P LSTA Leveraged Loan Index was up 44 basis points. Municipal bonds outperformed their taxable counterparts in April in the short and intermediate maturities, but the longer ones lagged slightly. Limited issuance and steady demand continue to support the tax-exempt market. As positive as April was for the domestic fixed income markets, the global fixed income markets did even better. The Bloomberg Barclays Global Aggregate ex-U.S. Index returned 1.42%, while the JPMorgan EMBI Global Diversified Index was up 1.49%. The Bloomberg Barclays Global High Yield Index was up 1.73% for the month, led by the European high yield markets, up more than 3%.

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