Monthly Market Update for May 2020

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Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy, and the global financial markets.

Global Economy:

While economic data continues to reflect the extreme impacts of the COVID-19 pandemic, global markets remained tilted toward optimism in May. With a sense of hope in gradual re-openings and underlying trends, volatility continued its decline and investors re-risked portfolios despite pressured US-China relations and evidence of social turmoil. The bull case rests on the efficacy of fiscal and monetary policy support, the pace of economic recovery mimicking that of China, and the avoidance of material “second wave” infections. Acknowledging how forecasts in this environment are of limited use, contractions in both supply and demand suggest global GDP will decline between 4.5% and 5.0% for 2020. In the midst of one of the sharpest recessions in history, valuations provide limited cushion against a bumpy path forward.

The Federal Open Market Committee (FOMC) did not formally meet in May, but the mid-month airing of Chairman Powell’s interview with 60 Minutes captured much attention. Without minimizing that “this is a time of great suffering and difficulty,” he reiterated confidence in the Fed’s ability to “buy time” with virtually unlimited policies that keep businesses and ultimately people out of insolvency. While barely starting to tap the vast firepower available through emergency lending facilities already announced, the balance sheet of the Fed expanded to $7.2 trillion in May.

The second estimate of 1Q-20 real GDP indicated a contraction of -5.0% annualized, with a downward adjustment to inventories offsetting slight upward revisions to consumer spending and nonresidential fixed investment. Analysts are bracing for a significantly worse drop for 2Q-20, with estimates ranging from -25% to -50% annualized. A recovery in the second half of the year is broadly expected, although the pace at which this occurs could influence US elections.

More than 42 million US workers have filed initial unemployment claims since mid-March. With that as a backdrop, it surprised markets when the government’s surveys indicated that 2.5 million jobs were added in May and that the official unemployment rate fell back to 13.3%. It’s not clear how enduring this trend will be as activity resumes, but a key factor for consumption will be understanding whether virus-related job losses are indeed temporary. Inflation expectations moved slightly higher during the month but remain quite anchored for the decade ahead. Core CPI is now only +1.4%year-over-year, while the FOMC’s preferred measure, Core PCE, edged down to just +1.0% year-over-year through April.

Global Markets:

Returns for all major equity sectors and indices were positive in May amid optimism that the worst of the economic shock from COVID-19 had passed. The S&P 500, which represents large US-based entities, continued to recover from March’s steep drop with a +4.8% return. Information Technology (+6.8%) and Materials (+6.7%) led the way with Communication Services (+6.0%) and Industrials (+5.0%) also posting above-average returns. Energy (+0.7%) and Consumer Staples (+1.4%) were the relative laggards. Small cap stocks, as represented by the Russell 2000, continued to perform strongly, with a +6.5% return in May. Among the sectors, Consumer Discretionary (+17.0%) was a positive outlier. Energy was the only negative performer (-3.3%) after leading the way the month before. Across the market capitalization spectrum, Growth resumed its advantage over Value.

In the broad international developed markets, the MSCI EAFE index rose +4.4% as all sectors and countries participated in the rally. Led by Materials (+7.7%), Industrials (+7.3%), and IT (+7.2%), there was broad support for the markets, with Real Estate (-0.7%) being a notable laggard. Germany (+8.9%) continued to do well during the month, with most other countries generally in the 4% to 7% range. Hong Kong (-8.4%) and Singapore (-3.2%) were relative underperformers as relations with China drove increased concern in the Pacific ex-Japan region.

Emerging market stocks, as represented by the MSCI Emerging Markets index, underperformed their developed market counterparts at +0.8%. Brazil continued to recover (8.5%) but remains down more than 40% year-to-date. Dominant markets in Asia were soft, with China (-0.5%), Taiwan (-2.5%), and India (-2.8%) all losing ground.

Real estate, as measured by the FTSE EPRA/NAREIT Developed index, largely failed to participate in the rally with a return of just +0.3% amid structural headwinds. The energy-related Alerian MLP index improved more significantly, advancing 9.0%. The near-month NYMEX oil contract nearly doubled in May (+88.4%) but remains off by -41.9%year-to-date. Gold extended its 2020 rally, adding +2.5% for the month. The diversified Bloomberg Commodity index displayed a better tone (+4.3%) for the month as broad-based demand for most commodities began to recover.

US Treasury (UST) yields held relatively steady across the board in May, generally failing to confirm the optimism that boosted risk assets. While the effect of the Fed’s expanded asset purchase capabilities cannot be ignored, the volume of deficit-related UST supply has extended the steepening bias for the government yield curve. The 2-year UST yield ended the month lower at 0.16%, while the 30-year UST yield finished higher at 1.41%. Given this backdrop, the overall UST complex gave up some performance on the long end, but year-to-date returns remain impressive at +8.6%. As sovereign yields outside of the US were mixed, the global stock of negative yielding debt expanded to $12.7 trillion.

The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on both an absolute and duration-matched basis as credit spreads recovered materially. With a gain of 0.5% in May, the benchmark’s trailing 12-month performance of +9.4% remains impressive given prevailing yield levels. Despite record-setting new issuance, IG corporates have been well supported by the Fed’s announced intent to embark on both primary and secondary market purchases. Corporate spreads improved by another 28 bps for the month, with BBB-rated issues again recovering most dramatically. As wider MBS spreads offset improvements across other categories, the benchmark’s yield-to-worst was stable at just 1.34%.

The BloomBar 1-15-Year Municipal index outperformed in May, with the return of 2.8% representing the highest monthly gain in over a decade. Although the Fed’s new Municipal Liquidity Facility has not yet been utilized, and fiscal policy support remains uncertain, tax-exempt yields moved lower amid strong technicals and Municipal/UST ratios compressed.

The BloomBar US Corporate High Yield index returned +4.4% for the month, directionally consistent with higher-risk equities. Benchmark spreads were 107 bps tighter on average, although the credit curve remains steep. All-in yields have fallen back to 7.0%, even as default rates pushed ahead of the long-term average. Bank loans continued to recover, and emerging market bonds of all varieties produced solid returns as investors sought enhanced income.



The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.

Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.

Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Gryphon Financial Partners 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. Gryphon Financial Partners, LLC is an Investment Adviser.

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