PMC Weekly Review - June 01, 2018
A Macro View: May Monthly Recap
Domestic equity markets resumed their march higher in May, behind positive earnings and a shift in investor sentiment, despite some weakness in the market that closed out the month. The major US indices moved back into positive territory year to date and locked in solid monthly gains, with the S&P 500 Index gaining 2.4%, its best monthly performance since January. Despite the overall gains, the month ended with increased anxieties over trade wars, geopolitical concerns with North Korea, and a political crisis in Italy. Renewed fears concerning a global trade war (with announcements of new tariffs) stifled some investor optimism, in spite of continued positive economic and corporate data. Corporate earnings have been a fundamental factor continuing to drive stocks higher, as companies represented in the S&P 500 Index reported an average of more than 20% year-over-year earnings growth in the first quarter. The employment report showed an addition of 223,000 jobs in May, the unemployment rate declined to 3.8%, and wage growth increased by 2.7%. The second reading on Q1 GDP ticked lower to 2.2%, from a preliminary reading of 2.3%. Consumer spending, which makes up more than two-thirds of the US economy, dipped slightly to 2.6%, slowing somewhat after driving much of the growth in prior quarters.
Within this context, domestic equities were mostly positive during the month. The S&P 500 Index gained 2.4%, bringing its year-to-date return to 1.9%, whereas the NASDAQ Composite Index gained 5.5%, behind strong earnings from the Information Technology sector. Small caps widely outperformed large caps by more than 350 basis points, as the Russell 2000 Index returned 6.1%, compared with 2.6% for the Russell 1000 Index. In a large trend that has carried over from 2017, growth stocks widely outperformed value, with the Russell 3000 Growth Index gaining 4.5% vs. 1.0% for the Russell 3000 Value Index. Given growth’s outperformance in May, its year-to-date difference in outperforming value stands at nearly 800 basis points (6.4% vs. -1.4%). In terms of sector performance, Information Technology was the strongest performer, gaining 7.4% in the month, followed by the Energy and Industrials sectors, which each gained 3.0%. Utilities and Telecommunications were the main laggards, returning -2.3% and -1.1%, respectively. Oil prices traded lower on the month, following reports that the Organization of Petroleum Exporting Countries (OPEC) and Russia could begin ramping up production.
International equity markets mostly trailed domestic equities, as both the strong dollar and geopolitical concerns weighed heavily on international stocks. The MSCI ACWI ex-U.S. Index declined by 2.3% for the month, which dragged its year-to-date return down to a loss of 2.0%. Prior signs of economic strength in Europe were outweighed by the political turmoil in Italy and looming fears of a global trade war. Italy’s anti-establishment parties failed to form a coalition government, following Italian President Sergio Mattarella’s refusal to accept their choice as economy minister. This led to fears of impending snap polls that would resemble a referendum on Italy, the thirdlargest member of the EU, remaining in both the union and the euro. President Trump has either announced or discussed bans on aluminum, steel, and luxury cars, among other goods, with foreign countries preparing retaliatory measures. Eurozone GDP growth was 2.5% year over year in Q1, a slight decline from 2.7% in Q4, with both cold weather and fears of a trade war cited as the reasons behind the slowdown. The MSCI EAFE Index, which measures performance of international developed equities, posted a loss of 2.5%. Regionally, Europe was a main cause of much of the weakness, with the MSCI Europe Index returning -3.3%. Breaking trend from what had been a relatively strong 2018 thus far, emerging markets equities sold off aggressively, returning -3.5%, and wiping out their year-to-date gain. China was a sole emerging markets bright spot, posting a 1.8% gain, whereas the MSCI EM Latin America Index posted a decline of 14%.
Fixed income markets were mixed in May, with most domestic fixed income securities being bid higher, as investors moved towards more conservative positioning amid the turmoil in Europe. The yield on the 10-Year Treasury Note fell to 2.86%, down nine basis points from 2.95% at the end of April, but had traded as high as 3.11% mid-month. Minutes from the May 1-2 FOMC meeting revealed that inflation is approaching the Committee’s target, helping to secure the market’s expectations for a June rate hike. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.7% for the month, but is still down 1.5% year to date. Global bonds trailed domestic fixed income in May, for the second straight month, as the strong dollar and geopolitical concerns led to weakness abroad. The Bloomberg Barclays Global Aggregate ex-U.S. Index declined 1.9%, and is now -0.6% year to date. Municipal bonds slightly outpaced their taxable bond peers, with the Bloomberg Barclays Municipal Index gaining 1.2%, trimming its year-to-date loss to -0.3%. High yield fixed income trailed investment grade, with the Bloomberg Barclays Corporate High Yield Index returning -0.03%, bringing its year-to-date return to -0.2%.
VP, Senior Portfolio Manager
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2018 Envestnet. All rights reserved.