Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
In the US, the Commerce Department revised 1Q-17 real gross domestic product (GDP) upward from 0.7% to 1.2%. Personal consumption expenditures (PCE) rose 0.2% in April, but year-over-year (YoY) reading was 1.7%, down from the 1.9% annual rate in March. The labor market was mixed, with jobless claims remaining relatively low and unemployment declining to 4.3% (its lowest level in 16 years). Wage growth remains stubbornly low at 2.5% and the pace of average job growth is significantly down from 2015 and 2016. The latest readings on housing starts and both new and existing home sales came in lower than expected. President Trump’s plans for tax reform and fiscal spending may face a tough road ahead due to political headwinds. On the positive side, corporate earnings and revenue reports have been very strong.
The Federal Reserve took no action in May, but is expected to raise rates by another 25 basis points (bps) at its next meeting in mid-June. With the recent slowdown in inflation, the market is divided on whether we will see a third move higher by year-end as the “dots” project. Meeting minutes indicated broad support for a gradual reduction of the Fed’s $4.5 trillion balance sheet by year-end. Importantly, this is to be accomplished by letting maturing bonds roll off, not reinvesting the proceeds unless they exceed a cap limit, which is expected to grow over time.
As the snap-called general election approaches in the United Kingdom (UK), things are not as rosy for the Conservatives as was originally believed. The Dementia Tax issue, among others, has turned a potential landslide victory for the Prime Minister into a tight race, raising concerns that there will not be a strong coalition for Brexit negotiations. Emmanuel Macron has had a strong first month as President of France, suggesting his plans for reviving France’s economy may be given a chance. Also in the Eurozone, unemployment fell to 9.3% in April, the lowest level in eight years.
A political scandal in Brazil caused some turmoil in emerging markets. However, economic news was positive as GDP was up for the first time in two years and manufacturing statistics were stronger. The Caixin-Markit manufacturing index in China dropped below 50 in May, signifying contraction for the first time in nearly a year. China’s sovereign credit rating dropped from A1 from Aa3 at Moody’s, but the news wasn’t met with much surprise given the well-publicized accumulation of debt. Japan had real GDP growth of 2.2% in 1Q-17, which was driven by net exports and capital spending beating estimates.
Overall positive news across the world led to equity gains once again, with only domestic small cap equities spoiling the party. In the US, the S&P 500 reached 8.7% for the year, with a 1.4% gain in May. The Russell 2000 was off 2.0% for the month, reacting primarily to the troubles within the Trump administration and the impact on potential tax cuts. Growth stocks continue to outperform value stocks, with a 2.7% advantage among the large caps and a 2.2% advantage in small caps. At the sector level, technology and utilities led the way within the S&P 500, up 4.2% and 3.6%, respectively, for the month. On the other side, energy stocks continued to feel the effects of falling oil prices, down 4.0% for the month. Financials and telecommunications were also down, at -1.4% and -1.0%, respectively.
Globally, both developed (MSCI EAFE) and emerging market equities continued to shine, bringing their year-to-date (YTD) returns to 14.4% and 17.3%, respectively. Asia was a big part of the growth in emerging markets, retuning 4.5%. The developed markets were uniformly strong, with the exception of Pacific ex Japan, which was down 1.0%. Europe looks solid overall with generally positive economic news from Germany, Spain, and France, in particular. It appears unlikely that the European Central Bank (ECB) will take any monetary tightening action in the near future, consistent with ongoing low inflation expectations.
Real estate in the US was down, with the NAREIT US Real Estate off 0.2% for the month, but is still up 3.3% for the year. The Alerian MLP index was off 4.5% for the month as energy prices continue to negatively impact performance.
Organization of the Petroleum Exporting Countries (OPEC) continued its efforts to prop up oil prices with an agreement to limit production through March of next year. This had little impact on the market, though, with NYMEX crude ending the month at $48.32, down from $49.33 in March. Gold slipped below $1,220 in early May, but recovered to be up just slightly for the month.
Global bonds remained well bid, with the broad Bloombar Global Aggregate index advancing 1.6%. With historically low correlations to equity markets, the continued rally in bonds has caused some market observers to question the sustainability of the low-volatility regime benefitting risk assets. Given varied political distractions, Trump-related policy optimism continued to fade, and domestic yield curves exhibited a flattening bias that allowed the US Treasury (UST) complex to return 0.7% in May. With the market pricing a roughly 95% chance that the Federal Reserve will extend its path of “gradual” monetary policy adjustment at the June 13/14 meeting, two-year UST yields settled slightly higher at 1.28%. The 10-year UST remains range bound, but more muted assumptions around forward growth and inflation ultimately caused this benchmark yield measure to decline 8 bps and finish at 2.20%. The Bloombar US Aggregate index provided modest duration-adjusted excess return, advancing 0.8%. The Bloombar US Corporate Investment Grade index added almost 1.2%, as longer-duration and lower-rated issues outperformed. The Bloombar US Corporate High Yield index provided total returns of 0.9% in May, with CCC-rated bonds resuming their leadership role.
Unhedged developed international bonds delivered more robust gains given the sustained decline in the US dollar (especially relative to the euro) and the positive impact of currency translation for US-based investors. The ECB made no policy changes in May. However, President Mario Draghi stated that structural headwinds and resource underutilization have kept inflationary pressures low and that these conditions continue to warrant “extraordinary support” despite some recovery in the European economy. Benchmark German 10-year rates declined modestly, with sovereign yields in other developed markets generally following suit.
Emerging market bonds extended their impressive YTD rally, driven by the attractiveness of higher interest rates offered versus developed market bonds and steady/improving economic fundamentals. The USD sovereign JPMorgan EMBI Global Diversified index rose 0.9%, while local currency denominated EM bonds within the JPMorgan GBI-EM Global Diversified index returned 2.0% for the month despite modestly higher rates and currency weakness in Brazil.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.