Volatility continued for the equity markets in April, though the averages finished the month little changed. Bond yields continued to rise, causing a slight loss for the typical bond funds and longer‐dated bonds. This confirms my stance of staying away from interest rate sensitive and long‐dated funds and for keeping maturities and duration short.
1st quarter GDP showed a stronger than expected 2.3% increase. Employment remains strong with wage growth up 2.8% year over year. Consumer spending as well as incomes continue to increase. Evidence continues to point toward an improved back‐drop for economic growth.
Though the Fed is likely to keep monetary policy on hold at this month’s meeting, they remain on track to continue increasing short‐term interest rates. The Fed Funds target range currently sits at 1.50‐1.75% with additional increases coming. The Fed recently noted some pickup in inflation and expects conditions to warrant “further gradual rate increases” throughout 2018.
1st quarter earnings are posting strong results. 82% of the companies that have reported so far have beaten estimates and 65% have topped their revenue expectations. Overall earnings growth is expected to come in better than 20% for the 1st quarter. Current quarter also is shaping up for solid numbers.
Market volatility likely will continue as the market seeks to strike a balance between the stronger economic growth we’re seeing and the unknown effects of potential higher interest rates and inflation. Inflation remains under control and right at the Fed’s target of 2.0%. Interest rates, which are rising from very low levels, should increase as the economy continues to gain traction.
Even as the markets face heightened volatility, fundamentals for U.S. companies remain strong. Equity valuations are very reasonable at just under 17x this year’s earnings. Balance sheets are strong, dividends are increasing, and earnings growth is at an all‐time high. As long as these fundamentals remain in place, equities should move higher with pullbacks being short‐lived.
Best Regards, Clay