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.
The month of May brought the withdrawal of the US from the Iran Nuclear agreement, the end of the exemption on steel and aluminum tariffs for key US allies, and no noticeable progress on a revision to the North American Free Trade Agreement (NAFTA). After a series of on-again / off-again communications, the leaders of the US and North Korea now appear set to meet in Singapore on June 12. Italian political strife emerged as the most stirring risk-off test for markets, as the country worked to put together a new government led by Eurosceptic parties.
The Federal Open Market Committee (FOMC) met during the first two days of May but unanimously voted not to increase rates. Expectations are for another 25 bps hike at the June meeting, which will include a press conference and updates to economic projections. Implied rates are vacillating between one and two additional hikes in the second half of the year. Core PCE, the FOMC’s preferred measure of inflation, has risen 1.8% over the past 12-months.
The first revision of 1Q-18 GDP lowered it from 2.3% to 2.2%. Expectations are that with lower inventory investment during the quarter and a likely increase in consumer purchases, there will be an increase for 2Q-18, perhaps to well-above 3%.
The unemployment rate dropped to 3.8%, a second consecutive drop after being stuck at 4.1% for six consecutive months. This was not completely unexpected, as the FOMC had projected unemployment to continue to dip. Wages surprised modestly to the upside, with an increase of 2.7% year-over-year as US economic slack continues to diminish.
In China, the measure of manufacturing by Caixin-Market met expectations, staying at 51.1 in May, remaining expansionary. The Service Purchasing Managers Index (PMI) also stayed constant at 52.9. Of note, the European Union has joined the US at the World Trade Organization in a trade dispute against China in a fight over intellectual property.
Domestic risk assets had a solid month, while the international markets, both developed and emerging, declined and are negative for the year. Large domestic stocks, as represented by the S&P 500, were up +2.4% for the month, restoring returns into positive territory for the year. Technology was far and away the top sector at +7.1%, while Telecom brought up the rear, down another -2.3%. Ongoing weakness was also shown in Consumer Staples and Utilities at -1.8% and -1.7%, respectively. Healthcare was flat for the month and is down slightly for the year at -0.5%.
Small cap stocks rallied significantly, up +6.1% for May and reaching +6.9% for the year. The category’s more domestically-oriented nature benefits amid trade uncertainty, with M&A also being supportive. Growth and value were both solid, with growth outperforming only marginally. For the year, growth has outperformed value by +4.0%.
In the broad international developed markets, the MSCI EAFE index was down -2.1% in May. Among the various regions, the Eurozone was down -3.1% given weakness in peripheral countries, while Pacific Ex Japan was up +0.3%. The MSCI Emerging Markets index was down -3.5% for the month, taking the asset class to negative territory for the year at -2.5%. The US dollar strengthened consistently throughout the month, detracting from overseas returns.
Real estate was up again in May, as the category’s income levels continued to offer excess value versus long-term interest rates. Though still down slightly for the year, the FTSE EPRA/NAREIT Developed index advanced +1.8% during the month. The FTSE NAREIT US Real Estate index gained +3.5% but remains down -2.8% on the year.
The Alerian MLP index was up again in May at +5.1% and is now up 0.9% year-to-date. The Bloomberg Commodity index continues to trend higher, up by +1.4% for the month, and has advanced +3.6% year-to-date.
It was a tale of two halves for the US Treasury (UST) market, as rates hit multi-year highs before turning dramatically lower in the final week of May. The overall UST complex returned +0.90% for the month, with longer-dated issues more than recovering the prior month’s loss (20+ year index up +2.2%). With slightly tempered expectations regarding the pacing of monetary policy action, front-end yields softened a bit. After briefly surpassing 3.10% for the first time since July 2011, the 10-year UST yield ended the month lower at 2.86%. The yield curve continued to flatten, but the futures market is still pricing somewhat below the Fed’s policy projections for 2019 and 2020.
The Bloombar US Aggregate index returned +0.7% in May, bringing year-to-date losses back to -1.5%. As credit spreads showed some weakness, the primary market’s most dominant sectors underperformed government issues on a duration-matched basis. IG corporate credit spreads were 7 bps wider, but all-in yields for IG corporates held constant at 3.9%.
The Bloombar 1-15-Year Municipal index returned +0.9%, as tax-exempt issues outperformed taxable counterparts. Maturities inside eight years benefited from a strong retail bid throughout the month, while the long end attracted crossover buyers looking to exploit attractive relative value. The 10-year municipal/UST ratio was volatile throughout the month of May, trading between 81% and 87%, but ultimately ended unchanged at just over 85%.
The Bloombar US Corporate High Yield index was virtually flat in May. That said, the benchmark’s overall spread widened by 24 bps, and the flattening of the credit curve (CCC vs. BB declining) is a bit unusual as the credit cycle ages. Unhedged international government bonds, particularly local currency emerging market debt (-5.0%), struggled with the impact of a stronger US dollar, which stood out as a safe-haven asset amid geopolitical uncertainties abroad.
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. 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 a Registered Investment Adviser.