PMC Weekly Review - June 3, 2016
A Macro View – May Monthly Recap
Domestic equity markets were mostly higher in May, with modest gains in most broad market indices. Investors continued to be focused on the potential that the Federal Open Market Committee (FOMC) will raise interest rates at its June meeting. Members of the FOMC talked up the possibility of a rate rise, indicating that the market had been assigning a low probability to that outcome. In addition, economic data continued to be unremarkable in the U.S. and remained lackluster in other parts of the world. The domestic political situation, although becoming clearer, remains extremely fluid. However, it is likely investors have yet to discount a November winner. Stock prices have rebounded sharply from their mid-February lows, but have failed to make a new high in over a year. The May employment report, released today, was very weak, as employers added a mere 38,000 jobs during the month, far below consensus expectations of 160,000. The employment results reflect recent trends in domestic economic data, which has showed signs of slowing. The latest estimate of first quarter real gross domestic product (GDP) came in at +0.8%, slightly below the +0.9% consensus forecast, but above the previous estimate of +0.5%.
Against this backdrop, broad market indices were modestly higher. The S&P 500 rose by +1.8%, and is now up +3.6% year-to date. The Dow Jones Industrial Average (DJIA) also climbed, posting a gain of 0.5%. The tech-heavy Nasdaq Composite Index jumped +3.8%, but remains slightly in the red for the year. The Russell 2000 Index of small cap stocks outpaced the Russell 1000 Index of large cap stocks, continuing their strong relative performance. Value stocks underperformed growth stocks. In terms of sector performance, the top performers were information technology, health care, and financials, with returns of +5.6%, +2.2%, and +2.0%, respectively. Energy and industrials were the poorest performers, with returns of -0.6% and -0.5%, respectively. Commodities were slightly lower, easing -0.2%. REITs posted solid gains, rising by +2.0%.
International equity markets were mostly lower, in contrast with U.S. equity indices. The MSCI World ex-U.S. Index slumped by -1.1%. Emerging markets also suffered, with the MSCI Emerging Markets Index declining by -3.9%. The MSCI EAFE Index, which measures developed markets performance, fell -0.9%. Regionally, Europe and China generated the best relative performance, declining by -0.6% and -0.8%, respectively. Latin America and Eastern Europe were the poorest relative performers, dropping by -10.8% and -6.2%, respectively.
Fixed income markets were mixed, as investors attempted to forecast the timing of the FOMC’s next move. The yield curve continued to flatten, with foreign demand for 10-year notes suppressing yields, as speculation of a rate increase put upward pressure on short-term rates. For its part, the FOMC has indicated that it would like to raise rates sooner rather than later, although the futures-derived probability indicates a rate increase won’t occur in June. Within this environment, the 10-year U.S. Treasury yield ended the month at 1.83%, up one basis point from the 1.82% level of April 30. Performance of broadbased fixed-income indices was mostly lower, with the Barclays U.S. Aggregate Bond Index advancing a mere +0.03%. Global fixed income markets suffered steep losses, with the Barclays Global Aggregate ex-U.S. Index falling -2.4%. Intermediate-term corporate bonds were lower, as the Barclays U.S. Corporate 5-10 Year Index edged down by -0.09%. The Barclays U.S. Corporate High Yield Index jumped +0.6%. Municipals were also modestly higher, gaining +0.3%.
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