The U.S. economy continues to muddle through at a very slow pace. 1st quarter GDP came in at a tepid 0.5% rate. Capital consumption is declining, inventory levels remain high and corporate profits are weak. Offsetting these negatives, the U.S. is experiencing a tightening labor market, lower energy prices and both manufacturing and construction spending are growing albeit slowly. The timing of the Federal Reserve’s next move, which is at the forefront of investors’ minds, remains uncertain. All but one FOMC member voted to keep rates the same at the April 26-27th meeting, suggesting the Fed is in no hurry to tighten monetary policy at this time. Inflation is not a major concern although the Fed is monitoring it carefully. CPI seems to be slowly creeping up with core CPI running at 2.1%. Inflation is being restrained by a strong dollar and cheaper energy.
The S&P ended the 1st quarter near a 4-month high, with a forward P/E of 16.6x, versus a 25-year average of 15.8x. The market held up during April amid further domestic weakness and an uncertain global economy. REITs retained their top spot as the best performing asset class for Q1, after winning the title for both 2014 and 2015. Emerging market stocks followed REITs, rebounding 5.75% during Q1. Commodities even eked out a gain of 0.42%. International equities were a mixed bag – with Greece and Italy reporting double digit declines, and Russia and Turkey reporting double digit gains. China fell nearly 5% and Japan fell over 6%. Economic policies initiated by the Japanese Prime Minister are not having a positive impact on Japan’s economy. Overall, global GDP is growing at about a 3% rate, highly dependent on China as the world’s second largest economy. Market volatility has settled down since early in the year with sentiment being worse than the underlying situation. However, bouts of volatility are likely to persist.
For more information on the economy and financial markets, please read our latest quarterly market commentary.