1st Quarter 2018 Economic & Market Review
Economy and the Federal Reserve
Global economic growth continues to improve. U.S. GDP came in at a 2.9% annualized rate for 4Q2017 (information reported in Q12018), slightly below the 3.2% annualized rate for 3Q2017. The readings from the last three quarters of 2017 were much higher than those reported in the first quarter of 2017. As reported last quarter, the economy is going into the 9th year of its expansion, the 3rd longest on record. The employment picture remained strong in Q12018 with the unemployment rate at 4.1%, still at a cyclical low. The housing market was mixed, as year to date home sales declined while year-over-year prices were up more than 6%. The Federal Reserve (the “Fed”), in March, raised the federal funds rate target by 25 basis points to a range of 1.50% – 1.75%; market expectations are for up to two additional increases in 2018.
Equities exhibited significantly more volatility during the quarter, with first quarter returns in negative territory for the first time since 3Q2015. Only Emerging Markets stocks were able to stay in positive territory for the quarter (+1.4% for the quarter; +24.9% for the previous 12 months). The MSCI EAFE Index (representative of developed non-U.S. equity markets) returned -1.5% for Q1 (+14.8% for the prior 12 months). Meanwhile, domestically, the S&P 500 Index, representing large-cap stocks, returned -0.8% in Q12018 after a +21.3% return in 2017. Breaking prior patterns, large-cap underperformed its mid- and small-cap counterparts for the quarter as the Russell Midcap Index and the Russell 2000 Index returned -0.5% and -0.1% respectively. Growth continued to outperform value across the market cap spectrum for the 1st quarter after outperforming by historical margins in 2017. For the quarter, Consumer Discretionary and Information Technology were the strongest performers, generating gains of +3.1% and +3.5%, respectively. The Consumer Staples, Energy, and Telecommunications Services sectors were the poorest relative performers, posting returns of -7.1%, -5.9%, and -7.4%, respectively.
Despite an uptick in the first quarter, US interest rates remain low by historical standards. Interest rates rose for short-term U.S. Treasury securities in the first three months of 2018, in concert with the Fed’s interest rate hike in March. The yield on the 10-year U.S. Treasury note also rose compared to its yield at the end of the year. The yield on the 3-month U.S. Treasury bill increased to 1.73% by quarter-end, up 34 basis points from its year-end level, and the 10-year U.S. Treasury note yield ended the first quarter of 2018 at 2.74% vs. 2.40% on 12/31/17. For the first quarter, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) returned -1.5% (+1.2% for the prior 12 months); the Bloomberg Barclays Long Credit Index was down -3.8% (+6.2% for the prior 12 months) and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index returned -0.9% (+3.8% for the previous 12 months).
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