Global Investment Outlook and Strategy
May 8, 2019
Robust U.S. GDP growth and better-than-expected corporate profits for the first calendar quarter helped propel the S&P 500 Index to an all-time high in April, with bottom-up earnings for the S&P 500 up +0.6 percent year over year versus expectation of -2.9 percent. Equity returns were positive in the month, with the S&P 500 Index and MSCI World Index generating returns of +4.05 percent and +3.55 percent, respectively, in April. Fixed income returns were also positive in the month. Better-than-expected growth was driven largely by gains in private inventories and net exports, two of the more volatile components of GDP. While GDP growth will likely moderate toward trendline of +2.2 percent exiting 2019 as the direct impacts of fiscal stimulus diminish, we believe this “Goldilocks” economic expansion can continue into 2020/2021. The year-to-date drop in personal consumption expenditure (PCE) price inflation to levels comfortably below the Federal Reserve’s target of +2.0 percent has contributed to rising market expectation for an interest rate cut as “insurance” against the risk of a potential hard landing in the economy. Despite strong year-to-date performance, the outlook remains constructive for equities over the intermediate term. However, elevated valuation, lingering macro uncertainty, and rising geopolitical risks (i.e., U.S.-China trade deal, Iran, Venezuela, North Korea, etc.) highlight the importance of diversified portfolios focused on quality growth stocks. Interest rates increased during April and the yield curve steepened as the combination of continued strength in the economy, better than expected corporate earnings, and accommodative Fed policy resulted in a partial reversal to the first quarter’s bond market rally. Overall, we expect yields to be relatively stable, gradually rising in conjunction with a re-steepening of the yield curve over the next few months as the economy recovers from the first quarter’s global slow patch.
For more details, including a longer discussion of the significance of an inverted yield curve, please see Sit Investment Associates’ April 2019 Global Investment Outlook and Strategy paper. Click here: Global Outlook and Strategy (Adobe Acrobat) or e-mail us at: firstname.lastname@example.org.