PMC Weekly Review – June 10, 2019

A Macro View: May Monthly Recap 

Domestic equity markets experienced widespread selling pressure throughout the month, as trade wars and tariffs dominated the news cycle. The S&P 500 Index notched its worst May in seven years and the second-worst return in May since the 1960s. Negative sentiment certainly existed at the beginning of May, but the market had mostly shrugged off bad news for all of 2019 behind a dovish Federal Reserve (Fed), which pushed domestic indices to record highs to close out April. However, just six days into May, markets were forced to embrace the news that trade negotiations with China broke down and the US was moving forward with tariffs. The S&P 500 Index declined 6.40% in May, but is still up 10.70% this year. The Dow Jones Industrial Average lost 6.30%, and the tech-heavy NASDAQ declined 7.80%. The US increased the tariff rate to 25% on $200 billion worth of Chinese imports and announced that it may impose a 25% tariff on the remaining $300 billion worth of Chinese imports. This led to China’s retaliating by increasing the tariff range from its current 5%-10% rate to a range of 5%-25% on $60 billion worth of US imports. On May 30, President Trump said that the US will impose a 5% tariff on all imports from Mexico until the flow of undocumented immigrants across the border stopped.

Within the context of heighted trade tensions, the stock market experienced more pain thus far than the economy did. Small cap stocks were the worst affected by the sell-off, with the Russell 2000 Index posting a loss of 7.80%, roughly 140 basis points behind large cap stocks, and bringing its year-to-date gain to 9.30%. Mid cap stocks slightly outpaced large and small caps, with the Russell Mid Cap Index losing 6.10%. Despite an environment that seemed primed for value to outperform, growth stocks finished slightly ahead, with the Russell 3000 Growth Index losing 6.40% compared with a 6.60% decline for the Russell 3000 Value Index. In terms of S&P 500 Index sector performance, Real Estate was both the top performer and the only positive sector for the month, gaining 1.20%, and bringing its year-to-date return to 18.30%. Healthcare and Utilities also experienced better relative results, with losses of 2.40%, and 0.80%, respectively, but both outpaced the S&P 500 Index by more than 400 basis points. The worst-performing sectors include Energy, Information Technology, and Materials, with losses of 11.10%, 8.70%, and 8.20%, respectively. Commodities declined 3.40% behind higher prices for precious metals, with gold up 2%, and despite energy selling off. Cryptocurrency came back into the spotlight, as Bitcoin surged, gaining 60% in May, and closing the month at $8,551.

International equity markets delivered poor results in May, but still outpaced US stocks, as the MSCI ACWI ex-U.S. Index declined by 5.40%. Fears of slowing global growth resulted in negative returns abroad. Aside from trade tensions, political change remained front and center. UK Prime Minister Theresa May announced she will step down as Conservative Party leader and resign as prime minister on June 7. May had struggled to unite Britain behind its withdrawal from the EU, but will continue as acting leader until a new prime minister is in place. In the world’s largest democratic election ever, more than 900 million voters took to the polls over six weeks in India. Incumbent Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) won in a surprise landslide over the Congress Party. The MSCI EAFE Index, which measures the performance of international developed equities, lost 4.80% and is now up 7.60% year to date. Emerging markets struggled more than their developed peers, with the MSCI EM Index declining 7.30% and now up 4.10% in 2019. Tariffs and the trade war weighed on Chinese stocks, and China was the worst regional performer, losing 13.10% for May and bringing its once double-digit year-to-date gain to 4.60%. Eastern Europe was a bright spot within emerging markets, with the MSCI EM Eastern Europe Index gaining 1.40% and a year-to-date return of 13.60%.

Fixed income markets posted gains for the month, as investors flocked to safer assets amid the selling pressure for risk assets during May. Treasury yields fell sharply over the month as the bad news continued to pour in, with markets now pricing in a likelihood of three rate cuts by the end of 2020. The yield on the 10-Year Treasury Note declined 37 basis points to 2.14% from 2.51%. The yield curve continued to invert as longer-term rates fell, reaching its widest level since the financial crisis, with the 3-Month Treasury Bill yielding a higher rate than the 10-Year Treasury Note. The Barclays U.S. Aggregate Bond Index gained 1.80% for the month and is now up 4.80% year to date. Global bonds posted slight gains but trailed domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index gained 1%. Lower-quality debt struggled, as the Barclays US Corporate High Yield Index lost 1.20% and is now up 7.50% in 2019. Municipal bonds mostly trailed their taxable peers for the month, but still posted a slightly positive return, with the Barclays Municipal Index gaining 1.40%. 
Tim Murphy 
VP, Senior Portfolio Manager

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