U.S. Stock Market
Stocks recorded solid gains in April, continuing their strong start to the year. The S&P 500 and Nasdaq Composite Indexes hit new all‑time highs at the end of the month, while the other major benchmarks remained modestly below the peaks they established in the fall of 2018. Trading volumes were generally muted despite the release of many first‑quarter earnings reports. Volatility was also notably subdued, with the Cboe Volatility Index (VIX) touching its lowest level in six months.
Sector performance varied widely. Within the S&P 500 Index, financial shares rose 9% on a total return basis, helped by better‑than‑expected earnings results from J.P. Morgan Chase. Communication services shares were also strong, lifted by an earnings beat from Facebook and enthusiasm over Walt Disney’s plans for a new video streaming service. A rise in Microsoft shares helped drive strong gains in technology stocks and propelled the company past USD 1 trillion in market capitalization for the first time—a threshold matched only briefly by Apple and Amazon.com. Health care shares fell nearly 3%, with insurer stocks dragged lower by fears over seeming momentum for a change to a single‑payer system.
Recession Fears Abate
Renewed confidence in the global economy seemed to be a primary factor boosting sentiment in April. The S&P 500 Index had its best and biggest daily move of the month on April 1, following news of a resurgence in the ailing Chinese manufacturing sector—often viewed as a barometer of global economic conditions. Investors were also encouraged by favorable gauges of U.S. manufacturing and service sector activity. Rising oil prices throughout much of the month seemed to reflect healthy global demand, although the Trump administration’s decision to stop granting sanctions waivers for Iranian oil imports also played a role.
April’s labor market data were especially strong. March payrolls rose more than expected, February’s disappointing print was revised higher, and weekly jobless claims reached new five‑decade lows. Wage growth slowed a bit during March, but the month saw a sharp rise in retail sales. Moreover, consumers appeared to be buying more without paying higher prices. While the Federal Reserve’s preferred inflation measure, the core (less food and energy) personal consumer expenditures price index, moderated somewhat in March, actual personal consumption expenditures rose at their fastest pace in nearly a decade. Not surprisingly, gauges of consumer confidence remained just below cycle highs.
|Dow Jones Industrial Average||
|S&P 500 Index||
|Nasdaq Composite Index||
|S&P MidCap 400 Index||
|Russell 2000 Index||
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended April 30, 2019. The returns include dividends based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Hopes Grow That Trade Deal Is Near
Investors also appeared encouraged by a more stable policy environment. Early in the month, President Donald Trump announced that the U.S. and China were nearing an “epic” trade deal. While no deal materialized by the end of April, high‑level talks continued, and President Trump stated near the end of the month that Chinese President Xi Jinping would soon visit Washington, presumably to sign an agreement. Investors may have also been relieved by the European Union’s decision to grant the British government a six‑month extension to develop a new Brexit plan.
Reports released by the end of April indicated a modest overall decline in large-company earnings in the first quarter, but investors seemed pleased that companies were mostly able to hold on to the surge in profits they had enjoyed in 2018. As of April 26, FactSet was estimating that overall earnings for the S&P 500 had declined by 2.3% versus the year before, held down in part by higher labor costs. Revenues were expected to have grown by a little over 5%, however, and analysts polled by FactSet expected earnings growth to resume at a moderate pace later in the year.
Expansion Is Likely To Continue, But Its Benefits May Become More Concentrated
While the expansion appears poised to enter a record 11th year in July, the recovery from the financial crisis has been an exceptionally slow one that has restrained the “animal spirits” of both consumers and investors. The absence of any late‑cycle excesses—as exemplified by the latter stages of the dot‑com boom of the 1990s and the housing boom of the next decade—makes us optimistic that the current expansion has room to run. Nevertheless, as the impact of the December 2017 tax cuts on year‑over‑year earnings comparisons rolls off and fiscal stimulus wanes, earnings growth should be harder to come by and thus concentrated in fewer companies. This could favor an active approach to investing, along with careful fundamental research to identify firms able to leverage competitive advantages and prosper in a more challenging environment.
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