During the first quarter, the U.S. economy expanded at a much higher rate than anyone originally expected. GDP rose at a 3.2% annual rate in the first quarter compared with the consensus expectation of 2.3%. This was the strongest reading for the first quarter in the past four years and was a significant acceleration from the fourth quarter of 2018, when GDP increased at a 2.2% annual rate. Economic activity was bolstered by increases in net exports, inventory, and government spending. Not only was economic activity in the first quarter stronger than expected, but momentum accelerated toward the end of the quarter. For example, durable goods orders rose 2.7% in March compared with February, retail sales increased 1.6% in March, and unemployment has remained exceptionally low.
The S&P 500 increased 1.20% last week and closed at a new high on Friday. Year to date, the index has risen 17.27%. While the equity markets in the United States are hitting record highs, the rally in the corporate bond market has taken a break, as credit spreads in both the investment-grade and high-yield markets have traded in a very narrow band over the past two weeks. For example, the average credit spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade corporate bond market) closed at +113 last Friday, the same level as April 12. In the high-yield market, junk bonds have experienced a little bit of weakness as the average spread of the ICE BofAML High Yield Master II Index has widened 8 basis points over the past two weeks to +376. However, while credit spreads have not experienced much volatility recently, both investment-grade and high-yield bonds have performed extremely well thus far this year. Year to date, the average spread in the investment-grade market has tightened 44 basis points and in the high-yield market has tightened 157 basis points. The tightening of credit spreads and decrease in underlying interest rates have driven the investment-grade index 5.67% higher and the high-yield index 8.75%.