The U.S. economy slowed in the final quarter of 2018 as real GDP grew at an annual rate of 2.2% (the most recent data available). The current economic expansion is in its 10th year – the second longest expansion in U.S. history. The unemployment rate remained low at 3.8% for March; 196,000 jobs were created in the month, recovering from February's low of only 33,000 new jobs. Core CPI, which strips out food and energy prices, remained well below its 50-year average, growing at 2.0% in the 12 months through March. U.S. construction spending increased for a third straight month in February (most recent) and manufacturing activity rebounded in March.
After raising rates for three years, the Fed has indicated that it is unlikely there would be another rate hike in 2019 as part of its softened stance. The Fed also indicated that it plans to stop trimming its $4 trillion balance sheet in September. Despite four rate hikes in 2018, long-term rates have not kept pace; in late March the yield curve temporarily inverted with the 10-year Treasury bond yield falling below the 3-month Treasury bill yield. Corporate bond spreads rebounded in the first quarter after substantially widening at the end of 2018. High yield and emerging market (EM) bonds were the best fixed income performers in the quarter improving 7.1% and 6.6%, respectively. Treasuries increased by 2.1% while investment grade corporate bonds jumped 5.1%. Developed international bonds increased marginally by 1.6%. While the euro weakened against the dollar during the quarter, the pound strengthened. The British currency fell early in the quarter but strengthened in March due to expectations that Brexit would get resolved by quarter-end which failed to happen. The UK now has until the end of October to leave the European Union.
U.S. markets climbed steadily higher during the first quarter bringing strong returns back to the U.S. equity markets after the fourth quarter crash. The S&P 500 jumped 13.7% for the period - the best first-quarter return since 1998. Nine of the 11 S&P 500 sectors posted double-digit gains. Tech stocks led the way jumping 19.9%. Healthcare and financials had the smallest gains for the quarter, up 6.6% and 8.6%, respectively. Growth stocks outperformed value stocks with mid-cap growth having the best returns at 19.6%. The forward P/E for the S&P 500 increased to 16.4x for Q1, modestly above the 25-year average of 16.2x. After volatility spiked in the final quarter of 2018, the CBOE Volatility Index (VIX Index) ended the quarter substantially lower.
International equity markets rebounded for the quarter, but the recovery trailed the U.S. markets. EM stocks increased by 10.0% after declining by nearly 15% in 2018. China rallied 17.7% in the quarter, nearly recouping all of its losses from last year, as the country continued to pursue accommodative policies to offset the drag from U.S. tariffs. Developed Europe (ex-UK) and Developed Asia reported gains of 10.7% and 8.7%, respectively. The UK stock market moved surprisingly higher than Developed Europe (ex-UK) despite the lack of a Brexit deal. The Bloomberg Commodity Index improved in the quarter mainly caused by the recovery in oil prices. U.S. crude oil (WTI) jumped 33%, ending the quarter at $60.14 per barrel. REITs topped the chart for the best first-quarter return at 16%.
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