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At a glance

Equities are consolidating to start the second quarter as investors re-evaluate potential Federal Reserve rate cuts over the course of the year. Consumer spending remains resilient, though higher rates are dampening housing.

chart depicts global health trend at 39.9 trending weak to 64.8..

Source: Global Economic Health Check, U.S. Bank Asset Management Group, April 19, 2024.

U.S. Bank Global Economic Health Check

The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.

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Number of the week:

-5.5

The S&P 500’s return so far in April.

 

 

 

 

Term of the week:

Growth stock

Any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends, because the issuers are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term.

Quote of the week:

U.S. retail sales remained strong in March, growing 0.7% for the month after an upwardly revised 0.9% rate in February and a 0.9% decline in January. Gas stations and non-store retailers (such as e-commerce companies) saw month-over-month gains of more than 2%. Data through the first quarter indicates continued consumer resilience.

― Robert Haworth, CFA, Senior Vice President, Senior Investment Strategy Director, U.S. Bank

Global economy

Quick take: Higher interest rates are weighing on the U.S. housing market, but retail sales and consumer spending remain resilient. Inflation pressures continue to moderate in Europe. China’s economic activity is solid to start the year.

Our view: The global economy continues to see moderating growth, especially across manufacturing activity, and inflation continues to decelerate. Despite higher interest rates, the U.S. Bank Economic Team sees conditions consistent with a soft landing in the U.S.

  • U.S. retail sales remained strong in March, growing 0.7% for the month after an upwardly revised 0.9% rate in February and a 0.9% decline in January. Gas stations and non-store retailers (such as e-commerce companies) saw month-over-month gains of more than 2%. Data through the first quarter indicates continued consumer resilience.
  • Mortgage rates nearing 7% again are pressuring housing market activity. Housing starts fell 14.7% to a 1.32 million annual pace in March and building permits slipped 4.3% to an annual rate of 1.46 million homes. Nevertheless, home builder sentiment remained steady in April, with the National Association of Home Builders Housing Market Index holding steady at 51.
  • Inflation pressures continue to ease across Europe. Year-over-year consumer price gains slowed to 3.2% in the United Kingdom in March from 3.4% in February. In the eurozone, inflation rose 2.4% year-over-year in March, down from 2.6% in February, with services prices stronger and goods and energy lower compared to a year ago. Easier inflation pressures are likely to support interest rate cuts by the end of the quarter from the Bank of England and the European Central Bank, especially with near-zero economic growth.
  • China’s economy grew 5.3% year-over-year in the first quarter, besting the 5.2% pace in the fourth quarter of 2023. Improvements in industrial output, retail sales and fixed asset investments all supported economic growth. Property investment slid, reflecting ongoing challenges in the housing market.

Equity markets

Quick take: The popular U.S. equity indices are retreating in April following robust first quarter performance due to rising geopolitical tensions, elevated valuations and heightened concern that the Federal Reserve (Fed) will be slow to lower interest rates given recent indications of persistent inflation.

Our view: Looking over the longer term, inflation appears to be waning, interest rates are elevated but with downside bias into year-end and 2024 earnings projections have stabilized, all providing valuation support while serving as a basis for stocks to trend higher.

  • U.S. equities are consolidating. The S&P 500 is down 5.5% so far in April, with 10 of 11 S&P 500 sectors negative, leaving investors with few places to hide during this period of consolidation. The index has given back more than half the gains posted in the first quarter and is now up 4.1% year-to-date as of Friday’s close.
  • First quarter earnings are exceeding expectations, with company reporting beginning to ramp. As of Friday’s close, 14% of S&P 500 companies have released results; another 67% plan to release the next two weeks. At present, sales and earnings are trending up roughly 4.5% and 9.4%, respectively, according to Bloomberg, above expectations of 3.3% for both. On balance, airlines, banks and select credit card companies note that overall consumer and business balance sheets are in reasonably good shape.
  • Consensus projections for 2024 remain stable, with upside bias. Analysts forecast S&P 500 earnings of approximately $242 per share, according to Bloomberg, FactSet and S&P Cap IQ, reflecting 10% year-over-year growth. At current levels, the popular index trades at 20.5 times the 2024 estimate, at the high side of its 25-year historical average.
  • Both growth-oriented technology and defensive/income-oriented companies appear favorably positioned. The recent pullback is presenting an attractive entry point for technology-related companies in areas such as data collection, storage, processing, software and security. Conversely, interest rate sensitive sectors such as Utilities and Real Estate should benefit in the latter part of 2024, when the Fed is widely anticipated to lower rates.

Bond markets

Quick take: Inflation concerns remain the focus for bond investors after multiple Federal Reserve officials commented on their patient approach to adjusting interest rates last week. Investors pushed back timing of expected rate cuts, causing Treasury yields to rise. Riskier bonds delivered returns similar to Treasuries despite falling stock prices.

Our view: A diversified portfolio with normal fixed income allocations can help navigate market volatility. High-quality bonds offer a meaningful and steady source of income that compensates for inflation risks. Investors can further boost portfolio income with modest exposures to esoteric bond categories like mortgages not backed by the government and insurance-linked securities (reinsurance) that have favorable valuations and solid fundamental support.

  • Fed officials expressed little urgency to cut interest rates last week. Comments from multiple Fed officials, including Chairman Jerome Powell, focused on patiently maintaining current rate policy settings until inflation settles around their price stability target. Powell noted inflation has clearly taken longer than expected to slow down. Bond market rates indicate expectations that the Fed will likely cut by 0.25% in July or September with about 50-50 odds of another cut by year-end.
  • Swings in Treasury yields heighten the importance of maintaining normal interest rate sensitivity. Fiscal spending and inflation concerns pushed Treasury yields higher last week, but conflict in the Middle East spurred demand for safe assets like Treasuries and caused intermittent yield volatility. Normal fixed income exposures that primarily consist of high-quality bonds provide important diversification benefits for portfolios by helping offset equity price declines when investor risk appetite falls.
  • Riskier bond prices held relatively steady despite stock volatility. Strong investor demand for corporate and municipal bonds remains an important tailwind supporting high valuations in both categories. Generally solid fundamentals back the slightly below-average extra yield on corporate and municipal bonds relative to Treasuries. Slowing economic growth is a risk, drawing attention to upcoming earnings reports for the first quarter and state tax revenue data.

Real assets

Quick take: Commodities were the best-performing sector among real assets again last week led by industrial metals; investors were more concerned with the need to upgrade the electrical grid. This concern crossed over into infrastructure, with Utilities continuing as a top-performing equity sector. Real Estate continues to trail other real assets with interest rates moving higher.

Our view: Diversified publicly traded real estate trusts remain inexpensive relative to private real estate. Tangible assets with stable cash flows present relative opportunities if currently strong investor sentiment erodes. Commodities continue to display potential for inflation protection.

  • Real Estate traded in line with the S&P 500 last week. Retail and residential properties posted the strongest returns while cell towers and industrial companies fared the worst. However, all subsectors posted negative results. Public real estate continues to trade at discounts to private markets (individual properties).
  • Infrastructure stocks beat the broader market by 3.1% last week. Utilities and midstream energy led gains while railroads and toll roads were detractors from performance. Utilities continue to post solid returns despite the move higher in interest rates.
  • Crude oil prices fell 3.3% last week despite tensions between Iran and Israel. Over a longer-term horizon, the crude market appears undersupplied, which should act as a tailwind to prices. However, we acknowledge downside risk to prices if tensions in the Middle East de-escalate or if economic growth disappoints.
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Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The NAHB/Wells Fargo Housing Market Index is based on a monthly survey of members belonging to the National Association of Home Builders (NAHB). The index is designed to measure sentiment for the U.S. single-family housing market and is a widely watched gauge of the outlook for the U.S. housing sector.

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Investment products and services are:
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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.