THE MONTH IN BRIEF
In April, investors kept one eye on impressive corporate earnings and another on geopolitical developments in Asia and Europe. Earnings ultimately drew the most attention – the Dow Jones Industrial Average rose more than 1% for the month, while the Nasdaq Composite added more than 2%. The latest readings on some key economic indicators were disappointing, but consumer confidence and purchasing manager indices looked good. Positive economic news filtered in from both China and the eurozone. Home sales were up; mortgage rates down. Commodity futures largely struggled. All in all, the month featured more economic positives than negatives.
DOMESTIC ECONOMIC HEALTH
An extremely bullish stock market climate and abundant consumer confidence often coincide. In April, the nation’s most-watched consumer confidence indices remained high; albeit, not as high as they were in March. The Conference Board’s index declined to 120.6, 4.3 points lower than the previous month; the University of Michigan’s household sentiment index ended the month at 97.0, one point lower than its preliminary April mark.
Job creation had waned in March. The Department of Labor’s employment report showed only 98,000 net new hires in that month. Still, the jobless rate dipped 0.2% to 4.5%. The U-6 rate, measuring both unemployment and underemployment, declined 0.3% to 8.9%. Does all that seem incongruent? Two factors may help explain it. One, the number of unemployed Americans declined by 326,000 during March, for assorted reasons. Two, the DoL uses two different surveys to compile data for its monthly report. One tracks payrolls at businesses; the other, the employment status of individuals.
Turning from the workplace to the point of purchase, March saw flat consumer spending and a 0.2% downturn in retail sales. (Consumer incomes rose 0.2%.) In related news, America’s first-quarter GDP number was lackluster – the economy grew just 0.7% in the opening three months of the year, according to the initial estimate of the Bureau of Economic Analysis.
Consumer inflation declined 0.3% in March, with core consumer prices down 0.1%. Even after that significant dip, the yearly gain in the headline Consumer Price Index stood at 2.4%. The Producer Price Index ticked down 0.1% in March, leaving annualized wholesale inflation at 2.3%.
The Institute for Supply Management’s service sector purchasing manager index was at a healthy 55.2 in the third month of the year, though it was 2.4 points below its February reading. ISM’s manufacturing PMI, which had been at 57.2 in March, came in at a still-strong 54.8 for April. Hard goods orders were up 0.7% in March after a 2.3% gain in February.
GLOBAL ECONOMIC HEALTH
April brought news of economic improvement in China. During Q1, the nation’s economy grew at a 6.9% pace – the best pace seen in six quarters. That surpassed the 6.5% target set by its government.
Real estate investment had increased 9.1% and fixed-asset investment 9.2% from a year earlier, but the real boost came from a 21.0% year-over-year gain in local and central government spending. Disposable income grew at a yearly rate of 7.0%, a high unmatched since late 2015. Chinese factory growth did fall short of expectations in April, with the nation’s official PMI hitting a 6-month trough of 51.2.
Markit’s eurozone manufacturing PMI hit a 6-year peak in Q1, reaching 56.4; service sector PMIs for Germany, France, and Spain were all above 55 for the quarter. Markit estimated the Spanish economy growing by 0.8-0.9% in Q1, with projected expansion of 0.6% for Germany and France and 0.3-0.4% for Italy. Eurostat, the European Union’s statistical office, estimated euro area inflation at 1.9% in April, 0.4% higher than it had been in March.
In April, Argentina’s Merval (+4.98%) and France’s CAC 40 (+4.38%) made the biggest upward moves among foreign benchmarks. Spain’s IBEX 35 went +3.15%; Germany’s DAX, +2.38%. Three other major indices gained more than 2% in April: India’s Nifty 50 went +2.23%; the FTSE Eurofirst 300, +2.11%; and the MSCI Emerging Markets, +2.04%.
Other April performances: South Korea’s Kospi, +1.95%; India’s Sensex, +1.73%; Australia’s All Ordinaries, +1.49%; the MSCI World, +1.33%; Brazil’s Bovespa, +1.18%; Hong Kong’s Hang Seng, +1.11%; Japan’s Nikkei 225, -0.03%; Canada’s TSX Composite, -0.08%; Mexico’s Bolsa, -0.16%; the U.K.’s FTSE 100, -1.90%; China’s Shanghai Composite, -3.02%.
With stocks once again at or near record levels, commodities mostly cooled off. Gold was certainly an exception: it rose 1.59% last month to settle at $1,269.50 per ounce on the COMEX on April 28. Silver, on the other hand, sank 5.30% to finish April at $17.16. Copper gave back 2.23% for April; platinum, only 0.22%. The U.S. Dollar Index retreated 1.51%.
As for oil, it ended April under $50 – at $49.19 on the NYMEX, to be precise. It lost 3.26% on the month. Unleaded gas took the big tumble among major energy futures, dropping 9.33%. Heating oil’s loss was smaller at 4.36%. Natural gas futures advanced 2.41% for April. Two crops fell particularly hard – cocoa dove 11.94%; coffee, 8.65%. Sugar lost 4.30%. Cotton futures were up 2.34% in April, but corn dipped 2.12%, and wheat, 2.34%. Soybeans were down just 0.05% on the month.
With the Federal Reserve pledging to tighten as last year ended, who would have guessed mortgage rates would be lower in April than at the start of the year? They were. Freddie Mac’s April 27 Primary Mortgage Market Survey showed average interest on the 30-year FRM at 4.03%; in the January 5 survey, the average interest rate was 4.20%. A year-to-date decline was also evident for the 15-year FRM (3.44% to 3.27%). Average interest on the 5/1-year ARM was 3.12% in April, 3.33% in December. Between March 30 and April 27, the average interest rate on the 30-year FRM lessened 0.11%; for the 15-year FRM and the 5/1-year ARM, the respective descents were 0.12% and 0.06%.
Existing home sales were up 4.4% in March, according to the National Association of Realtors, a nice change from the (revised) 3.9% February retreat. New home buying, too, improved – the March gain was 5.8%, leaving the annualized advance at 15.6%.
Looking at other housing indicators, the January edition of the 20-city Case-Shiller home price index arrived, showing a 5.8% year-over-year increase. That bettered the 5.6% yearly rise seen in the December edition. The NAR announced a 0.8% retreat for pending home sales during March, contrasting with a 5.5% surge in February. Housing starts fell by 6.8% in the third month of 2017, but building permits rose 3.6%.
LOOKING BACK…LOOKING FORWARD
The Nasdaq Composite surpassed 6,000 for the first time in April, gaining 2.30% for the month. At the closing bell on April 28, the index’s 52-week advance stood at 26.64%. The S&P 500 added 0.91% in April; the Dow Jones Industrial Average, 1.34%. The small-cap Russell 2000 improved 1.05%. April’s stock rally thrust the CBOE VIX south by 12.53%; it ended the month at 10.82. The Nasdaq 100 was the pacesetter among consequential U.S. equity indices in April, rising 2.71%. At the end of April, the foremost equity indices watched by Wall Street settled as follows: DJIA, 20,940.51; NASDAQ, 6,047.61; S&P, 2,384.20; RUT, 1,400.43.
|% CHANGE||Y-T-D||1-YR CHG||5-YR AVG||10-YR AVG|
|REAL YIELD||4/28 RATE||1 YR AGO||5 YRS AGO||10 YRS AGO|
|10 YR TIPS||0.37%||0.12%||-0.30%||2.25%|
Sources: wsj.com, bigcharts.com, treasury.gov – 4/28/17 Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
On April 28, FactSet estimated 12.5% blended earnings growth for companies in the S&P 500. If that projected annualized growth rate holds, Q1 will turn out to be the best quarter for earnings growth in nearly six years. Earnings gains will certainly vary over succeeding quarters, but for the near term, this story of solid growth may continue to be the narrative. In early May, the most attention may be paid to the Department of Labor’s latest jobs report (Did the March data amount to an aberration? Did payroll growth pick up in April?) and the Federal Reserve’s newest policy statement (Will the central bank send hawkish or dovish signals?). Most investors are looking at the markets through a bullish lens right now, and barring some abrupt, troubling event, the bulls look ready to run for another month.
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