The Independent Market Observer

A Look Back at the Markets in April and Ahead to May 2019

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 7, 2019 1:06:53 PM

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look back at the marketsApril was the month that everything turned around . . . we hope. Job growth kicked back to very high levels, taking the unemployment rate to a 50-year low. Consumer confidence rebounded in a big way. And, perhaps as a consequence, retail spending also came in well above expectations. On top of all that good news, economic growth came in well above expectations for the first quarter—even as the Fed stepped back from its hawkish stance, leaving interest rates unchanged and likely to remain that way.

A look back

Political risks wane. With the economy looking better, April closed with political risks much lower than where they started the month. The Mueller report, expected to rattle markets, did nothing of the kind, as it proved to be much less politically explosive than anticipated. Brexit continued its transition from tragedy to farce as a six-month extension was agreed upon, preventing the U.K. from crashing out of the EU. Even the China-U.S. trade confrontation seemed to be on track for a constructive resolution.

Earnings beat expectations. Despite the economy looking brighter and political risks subsiding, expectations for corporate earnings—a primary driver of the stock market—were still pretty downbeat at the start of the month. To be sure, investors were looking for earnings to drop during the first quarter. But April brought us positive news here as well, with three-quarters of companies beating expectations. In fact, earnings are on track to increase rather than decrease—a significant swing.

Markets reach all-time highs. With all of these positive developments, it wasn’t really a surprise to see markets rise across the board. Here in the U.S., we saw new all-time highs. Internationally, we saw strong gains and a return to positive trends after months of weakness. Confidence had returned to financial markets, as well as to the economy, for a continued run and marked the best start to a year in decades.

A look ahead

Weaknesses persist. What can we tell from April’s data about whether the positive trends will continue? Here, the news is somewhat more mixed. Although the headline news is good (even great), the underlying data is weaker. Job growth was strong for the month, but there are signs it is declining. Consumer spending was strong, but after a period of weakness. And even though the political risks have subsided, they have not gone away—as we saw at the start of May with the sudden resumption of tariff threats.

Drivers of growth are not sustainable. Similarly, the strong first-quarter growth came from sources that are likely not sustainable. Much of the extra growth came from an improvement in terms of trade, to a level that we have rarely seen—and that improvement likely will not continue. Similarly, another big chunk of growth came from inventory buildup, which also will not continue. Overall, the most sustainable sources of growth underperformed during the first quarter.

Consumer demand should rebound. Although trade and inventories are returning to normal, the most substantial and sustainable source of growth—consumer demand—is well positioned to rebound in the second quarter. With job growth and confidence strong, even if things do slow somewhat, the economy is poised to continue to grow. 

It’s all about confidence

As we move into May, we can look back at April with a fair amount of confidence. Despite the very real risks that remain, the outlook remains positive from an economic and market perspective. April left us in a good place economically.

Much of the April gains came from a rebound in confidence for both consumers and business. That confidence is what will support any gains going forward. But, with the economy solid, that confidence is also most vulnerable to politics and will be most important to watch in May.

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