Last quarter’s trend of a broadly improving global economy appeared to hold up going into the second quarter, despite some softness in both first quarter U.S. GDP and in April manufacturing numbers. Apart from these weaker than anticipated economic readings, other measures such as wage and employment gains continued to appear healthy.
Financial markets had a lot to digest in April: The Trump administration failed to achieve any legislative wins in its first 100 days in office, and geopolitical risks heightened in the wake of saber-rattling between the Trump administration and North Korea and the latter’s launch of a series of nuclear missile tests. But, amid the tension, U.S. stocks (Vanguard 500 Index) still managed to rise 1 percent on the month.
Emerging-market stocks (Vanguard FTSE Emerging Markets ETF) turned in a slightly better performance, gaining 1.6 percent during the month. That paled next to Europe. European stocks (Vanguard FTSE Europe ETF) outstripped both U.S. and emerging-market stocks’ performance, returning nearly 4 percent during the month. Illustrating investors’ rising confidence, inflows into European stock funds rose to levels not seen in two years, as the region continued to see a string of good news. This included strong earnings growth from the nearly 20 percent of companies that have already reported quarterly results as well as a chorus of strategists issuing bullish calls on Europe’s stock markets. Performance was particularly strong in the last week of the month when investors breathed a huge sigh of relief after the first round of the French presidential election concluded on April 23. On May 7, Emmanuel Marcon won the French election and markets moved higher after his victory. Attention should now shift to parliamentary elections and whether Macron will be able to assemble a governing coalition.
Yields on U.S. government bonds remained in a narrow range for most of the month. The 10-year U.S. Treasury yield ended April at 2.3 percent, close to where it started the month. The muted performance tracked waning investor expectations for a President Trump–driven fiscal stimulus that would bring higher inflation and with it, potentially more aggressive Federal Reserve interest rate hikes. The softness reported in some of the economic data and geopolitical concerns likely also came into play.
Looking ahead, both domestic policy and geopolitical risks appear material. Key pieces of President Trump’s (and the Republican party’s) agenda, including an overhaul of the health care system, his recently released outline of proposed tax cuts, and a yet to be revealed infrastructure program, will likely be difficult to pass. At the same time, while relations with China appear to be off to a good start, and tensions with Mexico have subsided, the risk of confrontation with North Korea appears to have ratcheted up. Separate from the political realm, however, global economic fundamentals remain supportive of risk assets. OJM Group Investment Team