The U.S economy motored along in April, bolstered by a report showing that first quarter growth came in at a stronger than expected 3.2% (expectations were for 2.3%). Expectations for growth had been subdued following the fourth quarter of 2018, however personal spending showed a +1.2% increase, beating expectations. Net trade and inventories contributed the most to the rise in GDP growth.
Nonfarm payrolls rose 196k in March, beating expectations for a 177k increase. The unemployment rate held steady at 3.8% as the labor force participation rate edged lower to 63.0% from 63.2%.
Average hourly earnings ticked higher by +0.1% and are now up +3.2% YoY. Weekly initial jobless claims continued to drift lower, averaging just 205k in April.
The underemployment rate held steady at 7.3%. Housing continued to see softening in several high-end markets, however winter weather likely muddled many signals at this point.
Housing starts for March fell -0.3% (versus expectations for a +5.4% increase) while building permits dropped -1.7% (versus expectations for a +0.7% rise). Existing home sales dipped -4.9% (worse than expected) while new home sales rose a better than forecast +4.5%. The S&P CoreLogic CS US Home Price index showed a +4.01% rise in home prices through February.
The final read for April’s Markit US Manufacturing PMI came in at a slightly better than expected 52.6 while the ISM for April came in below expectations at 52.8 with the Price Paid number at 50.0 and the New Orders at 51.7. The preliminary Markit US Services PMI came in below expectations at 52.9. All numbers point to a positive though slightly less robust expansion of the US manufacturing and services sectors.
The US Federal Open Market Committee met May 1st and announced its latest policy decision that was widely expected: no change in rates or sentiment. The Fed Funds futures market is currently forecasting a 58% probability of a 25 basis point rate cut by October.
Despite a great start to 2019, international equities continue to trail their domestic brethren by a healthy margin. Although clearly preferable from a valuation perspective, international equities continue to struggle with sluggish growth in Europe and Japan, trade-war issues in China and currency challenges in many emerging market countries. Investor sentiment has been lackluster long enough to challenge even the most ardent mean reversion oriented investors.
We continue to believe international equities remain a compelling investment opportunity and will offer beneficial diversification to investors over time. The MSCI EAFE index returned +2.9% in April and is up +13.4% YTD. Emerging markets, as represented by the MSCI EM index, gained +2.1% in April and have risen +12.2% YTD.
With economies dominated more by financials than technology, international markets haven’t benefitted as greatly from the latest tech-fueled growth seen here in the US. Sector-wise, information technology led the way gaining +5.25% in April and +20.8% YTD, followed by Consumer Discretionary (+5.0% in April and +16.7% YTD) and Industrials (+4.5% for April and +15.3% YTD).
Laggards in April included Healthcare (-1.9%) and Real Estate (-2.4%). Chinese markets have rebounded sharply following apparent progress in trade negotiations with the US. After dropping -12% in the fourth quarter of 2018, the Shanghai Composite Index is up +23.5% YTD, despite a small decline in April.
At roughly 15x earnings, this market is trading roughly in line with its 10-year average. With economic growth averaging close to 6%, China remains an interesting investment opportunity for those with long time horizons.