Key Points:
- Slower economic growth in the first quarter of this year was expected but came in softer than economists predicted.
- Global stocks moved higher despite issues in the banking sector.
- Bonds had a good start to the year after a challenging 2022.
The US economy is slowing down in one of the most widely anticipated recessions of modern times. GDP (a measure of economic activity) increased at an annualized rate of 1.1% in the first quarter, which was a slowdown from the 2.6% gain in Q4 of 2023. Economists expect economic growth to continue to fall as higher inflation and corresponding higher interest rates have caused business investment to decrease and consumer spending to flatten. While US inflation has come down from the highs of 2022, it is still above the Fed’s 2% target and could cause additional increases in policy rates. The dramatic rise in interest rates over the past year has resulted in a few bank failures, with First Republic the latest bank being seized by regulators after losing $100B in deposits.
Stocks moved higher during April with the S&P500 gaining 1.56% despite the aforementioned headwinds. Communications Services (+3.77%) was the best performing sector with strong gains from Meta (Facebook) and Comcast. Financials posted a strong 3.18% return, suggesting some stability in the banking sector. Industrial stocks were the worst performer for the month, losing 1.18% with UPS and John Deere selling off in anticipation of an economic slowdown. The Dow Jones Industrial Average gained 2.57% while the NASDAQ Composite was flat for the month.
Treasury yields have fallen since the start of the year as the Fed should be close to the end of their tightening cycle. The Bloomberg US Aggregate Bond Index has gained 3.59% in 2023 after a difficult 2022. The focus in the bond market is now on the debt ceiling and how long the government can continue to service its debt. Leaders in Congress need to reach a compromise on spending and debt limits with the clock ticking. Past negotiations have come down to the wire so this time it may be no different.
International developed markets are having a good start to 2023 with the MSCI EAFE Index gaining 11.53%. European markets survived the winter without Russian energy supplies of years past. Liquified natural gas imports from the US and other major producers allowed the European economy to survive the winter without energy rationing. A strengthening Euro relative to the US Dollar has made these markets more attractive to US investors. Asian markets have lagged both US and Europe with the Chinese economy slowly opening.
Sources: Morningstar Direct, Wall Street Journal, BEA.gov