April brought warmer weather and positive returns to all major markets. Leading the return parade for April were commodities, up a stout 9.7% (driven by a 15.5% return contribution from oil alone), and Gold (+5.1%), which has now had a strong 22% gain for the year to date after 3 consecutive losing years. US stocks were up 0.4% during the month, and international developed stocks returned 2.2%. Emerging markets, which lead all equity categories this year, gained 0.4% as well. Bonds had a slight gain of 0.3%, resulting in a 3.3% gain year to date.
Positive returns in the commodity space were driven by a US "dollar downdraft" after the Federal Reserve's comments in April were taken by markets to mean a slow path to rising interest rates. The dollar has reversed course this year losing its luster compared to other world currencies (down 5.6% year-to-date). This has allowed oil, gold and other hard assets to move higher, and with them the stocks of related industries like energy and material companies. The long-term trend for commodities is now changing to positive for the first time since early 2014, though volatility will be ever present over the coming months. If the Federal Reserve decides to raise rates this summer, it should strengthen the US dollar, which would again challenge commodity prices.
The government released its initial look at first-quarter U.S. GDP and it was a disappointing +0.5% annualized growth rate-the slowest in 2 years. A similar pattern emerged in 2014 and 2015 when initial readings of -0.9% and +0.6% were followed by strong second quarter GDP readings of +4.9% and +3.9%, respectively. Digging deeper into the latest numbers, real final sales to domestic purchasers rose just +1.2%, the weakest annualized gain since the second quarter of 2013.
In earnings news, 55% of the S&P 500 companies have now reported first quarter earnings, and Thomson Reuters is forecasting that earnings will decline 6.1% overall. After removing energy components, Thomson Reuters is forecasting a smaller -0.5% decline. This is the longest decline in earnings since 2009 as companies have struggled for growth. As a symptom of this trend, the seemingly impregnable Apple announced its first quarterly revenue drop since 2003 at the end of April. The chart below highlights the recent year over year declines of earnings growth the market has produced the last several quarters:
In late April, the Federal Reserve held its key rate steady, as expected, and gave no indication that it is ready to shift to a tightening mode anytime soon. The Fed noted in its post-meeting statement that even amid further labor market strengthening "growth in economic activity appears to have slowed" and household spending growth has moderated. Unlike the March statement, where global economic and financial concerns outweighed domestic activity, U.S. domestic growth issues took precedence in this statement.
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