A Macro View: May Monthly Recap
Domestic equity markets continued their move higher in May, with the major US indices closing the month near record-level territory. Despite the strength in stocks, the month was not without drama, which led to a brief dip in optimism amid President Donald Trump removing FBI Director James Comey, fueling fears that this action could result in further Congressional gridlock and slow the potential fiscal reforms. However, the market filtered out the noise (as it has done this year) and focused on positive developments. First-quarter earnings reported through month- end were strong, with S&P 500 companies reporting earnings that were up roughly +14% and revenues that were higher by +7%, when compared with the prior year, with nearly 75% exceeding estimates. Volatility, as measured by the CBOE Volatility Index (VIX), reached levels not seen in more than 20 years and broke below 10 several times throughout the month. Although the Federal Open Market Committee (FOMC) left its key benchmark rate unchanged in May, as was expected, the Federal Reserve (Fed) meeting minutes indicate that a June increase is likely, with Fed Funds futures traders pricing in over a 90% likelihood of a 25bps increase. The second estimate of first-quarter GDP of +1.2% was better than initially reported. Consumer spending, the largest part of the economy, was revised higher to +0.6%, which was double the +0.3% pace in the advance reading.
Within this context, domestic equities were mostly higher during the month. The S&P 500 gained +1.4%, pushing its year-to-date (YTD) return to +8.7%, while larger gains were seen in the tech-heavy NASDAQ Composite, which advanced +2.7%, and is now up +15.7% YTD. The Russell 2000 Index of small cap stocks underperformed relative to the Russell 1000 Index of large cap stocks, with a monthly return of -2 %, compared with +1.3%, respectively. Growth stocks outperformed value stocks, with 268bps of difference between the Russell 3000 Growth’s return of +2.34% and the Russell 3000 Value’s return of -0.34%. In terms of sector performance, the top performers were Information Technology and Utilities, with returns of +4.4% and +5.1%, respectively. Energy and Financials continued to struggle in 2017, with both sectors producing negative returns, -3.4% and -1.2%, respectively. Commodity prices declined by -1.34%, while REITs were down slightly, at -0.6%.
International equity markets mostly outperformed their domestic peers in May. The MSCI World ex-U.S. Index increased by +3.2% for the month and is now up +13.7% YTD. International developed markets rallied behind improved economic sentiment in Europe and the future of the European Union (EU), following the French election victory of Emmanuel Macron over Marine Le Pen. The MSCI EAFE Index, which measures performance of international developed markets, gained +3.7%. Emerging markets posted strong results, with a gain of +3% on the MSCI Emerging Markets Index, which is now up +17.3% YTD. Regionally, China, Europe, and EM Asia were the best relative performers, with returns of +5.3%, +4.9%, and +4.5%, respectively. EM Eastern Europe and EM Latin America were the poorest relative performers, losing -3.4%, and -2.4%, respectively.
Fixed-income markets mostly posted gains during the month. The yield on the 10-Year Treasury Note began the month at 2.28%, moved higher to 2.42% at one point, and closed at 2.20%, a drop of 8bps for the month. Investors flocked to treasuries mid-month, leading to yield contraction amid concerns that the Fed intends to raise rates despite potential delays in fiscal stimulus. Within this environment, the yield curve flattened in May, as intermediate- and long-term yields declined from April levels, while short-term yields mostly held steady. Broad-based fixed income posted gains, with the Barclays U.S. Aggregate Bond Index increasing +0.8% for the month. Global fixed income markets performed slightly better, as the Barclays Global Aggregate ex-U.S. Index gained +2.2%. The Barclays U.S. Corporate High Yield Index increased by +0.9% and is now up +4.8% YTD. Municipals posted a gain of +1.6% during the month and are up 3.9% YTD.
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