After a strong third quarter, the U.S. economy advanced at a more moderate pace, growing at an annualized rate of 2.1% in the fourth quarter. This is consistent with the late stage economic recovery which began after the 2007-2008 global financial crisis. Prospects for increased infrastructure spending, lower taxes, and deregulation given the new administration may provide the economy with yet another push, but the degree and timing of the economic impact remains unknown.
Core CPI, which excludes food and energy prices, remained low but inflationary pressures are visible. The unemployment rate at 4.7% remained a bright spot and job creation is continuing at a strong pace. New orders for factory goods recently recorded its fifth consecutive monthly gain with a surge in demand for commercial aircrafts. Offsetting this, consumer spending leveled off in February amid delays in the payment of income tax returns. This was the smallest gain since August 2016. For the second time in three months, the Fed raised interest rates by a quarter point in March. Fixed income markets were less volatile, versus the prior quarter as aggregate bonds gained 0.82% for the quarter. The yield on the 10-year Treasury declined modestly to 2.40%.
The S&P 500 continued to climb rising more than 6% for the quarter, as some say it’s an extension of the so-called ‘Trump Bump’. Healthcare stocks staged a comeback jumping 8.37% in the first quarter after declining 2.69% in 2016. Energy and telecom stocks reported negative returns for the quarter. Large cap stocks outperformed small cap stocks reversing last year’s trend.
For the quarter, international equity markets outperformed domestic markets. The MSCI World ex-USA Index (includes developed countries only), the MSCI ACWI ex-USA Index (includes developed and emerging markets), and the MSCI EAFE Index (includes developed countries in Europe, Australasia, and the Far East) outperformed the S&P 500 by 88 bps, 191 bps, and 132 bps, respectively. Emerging markets reported the strongest return of all asset classes with a 11.45% return.
After ending the year on a strong note, commodities lost 2.33%, becoming the worst performing asset class for the quarter. Oil prices declined modestly but remained over $50 per barrel. Gold prices rallied. While real estate fundamentals are still strong, the cycle appears to be in the latter stages of its recovery. After weakness in the second half of 2016, REITs gained 2.97% in the quarter.
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