At the start of the week we saw US stocks as measured by the S&P 500 +7.86% YTD. International developed market stocks as measured by the MSCI EAFE was +12.25% YTD. Lastly, Emerging markets as measured by the MSCI EM was +14.04% YTD at the start of the week. Certainly a small sample size, but a good anecdote to remind us as investors that proper diversification means owning international stocks. Despite the strong performance international stocks still appear cheap in terms of valuation vs. US stocks or historical valuations.

My expectation for increased volatility in US and international markets has yet to materialize.

The first estimate for 1Q GDP had the US economy growing at a lower than expected rate of 0.7%. There was 2.4% growth in 4Q for the US economy.

The employment report for April had the US economy adding 211,000 jobs. This was a surprise to the upside.The unemployment rate fell to 4.4%.

Coming into the week 85% of S&P 500 companies have reported earnings and showing 22.6% y/y EPS growth for 1Q. Most importantly it appears that in 1Q companies generated EPS growth by increasing revenue vs. simply cutting costs.

In March Core CPI dropped to 2%, and the Fed’s preferred measure of inflation the “personal Consumption Expenditure (PCE) deflator also decreased to 1.8% y/y.

The Federal Open Market Committee (FOMC) maintained the target federal funds rate in the current range 0.75% – 1%. The expectation is still for more rate increases in 2017.

Conclusion: Right now the probability of global recession remains low. Valuations are reasonable and even cheaper in foreign markets. I continue to expect an uptick in volatility especially in US markets caused by unpredictability surrounding the president. However the environment remains bullish, with large cap growth companies appearing to be the preferred category.

– Wyatt Swartz

– 5/12/17