Monthly economic and market commentary

The economy
Signs of slower second quarter growth
As the second quarter began, the economy was showing signs of slowing, but still maintaining positive growth. The Commerce Department reported that first quarter GDP grew by 2.5%, which is the 15th straight quarter of positive growth for the US. Retail sales fell from March, but Autos and Housing remain the bright spot. An example of how the two are connected: truck sales improved in April due to increased demand from contractors and tradesmen in construction. Consumers are adjusting to new taxes implemented as the year started. As the month ended, concerns over the Federal Reserve ending its $85 billion per month of bond buying were tabled, as jobs and economic data remain decidedly mixed. The ISM manufacturing index fell to 50.7 from 51.3 in march, still showing improved order trends, but only modestly. Futures prices for a number of commodities remain below year ago levels. Inflation remains well below 2%, reducing worries about pricing power. Signs of the "great rotation" out of bonds into equities are still not compelling, as most new equity mutual fund flows appear to be coming out of vast money market reserves.

The stock market
US stock market pushes to new highs
The Dow touched the 15,000 level as the new month started, and equity prices around the world continued their push higher. US midcaps are leading the way this year, but the best monthly result came from international developed markets, particularly Japan (+8.7%). Emerging market equity investors are still hesitant on demonstrating buying confidence in the ability to engineer further gains in economic growth net of inflation. US Value stocks have so far outpaced growth stocks in 2013, as consumer staples, health care, and utility sectors outpaced the traditional market leading technology and industrial sectors by over 10%. We believe that emerging market equities (notably China, India, and Brazil) will have an opportunity to catch up to the US as global growth rebounds in the second half.

The bond market
Mixed data gave bond investors confidence about continued low interest rates
Bonds generated almost all of YTD returns in April, as fears of Fed Policy shifts were replaced with views that easy monetary policy will continue through 2014. The ten year US Treasury yield is back down to 1.6%, not far from 40 year lows, after touching 2% in March. We remain diversified in geographic, credit, and duration in the managers deployed. An amazing fact reported by the Wall Street Journal is that over 350 bond mutual funds are investing in some form of equities, as bond managers search for yield and return. High yield bonds which often act like equities are up 4.8% year to date, leading the bond market competition. Low default rates and higher interest paid have led to big demand in this category. Though this category looks attractive, we are cautious about the historic volatility of high yield issues, and choose to use it where it fits client risk tolerance, and in reasonable percentage allocations.