Commentaries

PMC Weekly Review - June 5, 2015

A Macro View – May Monthly Recap

Domestic equity markets generally maintained positive momentum in May, following through on April’s gains. The modest advance was hard-fought, as economic data during the month continued to indicate the economy is dealing with a so-called “soft patch.” The government’s second estimate of first quarter real gross domestic product (GDP) was a very disappointing -0.7%, lower than the already low first estimate of 0.2%, and below analyst estimates. Despite the contraction in the quarter, analysts are quick to caution that the economy is not in a recession, and that the dismal report was a result of a confluence of several temporary factors. Also hovering over the market is anticipation as to when, and by how much, the Federal Reserve (Fed) might move to raise interest rates. Earlier this year analysts had been expecting the possibility of a move to begin to normalize rates at this month’s meeting, but with the recent spate of discouraging economic data releases the first move is now expected to be sometime later this year.

Within this context, stocks generated slight gains in May. The S&P 500 gained +1.3% for the month, and is now up +3.2% year-to-date. The Dow Jones Industrials (DJIA) advanced +1.4% for the month. The tech-heavy Nasdaq Composite Index advanced +2.8% in May. The Russell 2000 Index of small cap stocks outperformed the Russell 1000 Index of large cap stocks, with returns of +2.3% and +1.3%, respectively. Growth stocks slightly outperformed value stocks during the month. In terms of sector performance, the top performers in the month were health care, information technology and financials, with returns of +4.5%, +2.3% and +1.8%, respectively. Energy and telecommunications services were the poorest performers, with returns of -4.8% and -1.8%, respectively. Commodities slid during the month, declining -2.7%. REITs were little changed in May, as interest rates stabilized somewhat.

International equity markets did not fare quite as well as domestic equity indexes during the month, as the situation in Greece continues to cloud the outlook. Developed markets, in particular, have been impacted by the bailout negotiations between Greece and its creditors. Inflation also is showing signs of accelerating in Europe, which has been the European Central Bank’s objective with its asset purchase program. The MSCI World ex-U.S. Index declined -0.8% for the month, paring its year-to-date advance to +7.7%. Emerging markets slumped in May, as commodities prices reversed. The MSCI Emerging Markets Index fell by -4.0% for the month, and the MSCI EAFE Index, which measures developed markets performance, was down -0.4%. Regionally, Japan was one of the only markets to post positive performance during the month, delivering a +1.3% gain. Latin America and Eastern Europe were among the poorest relative performers, with results of -7.0% and -6.0%, respectively.

Fixed income markets were modestly lower in May, with Treasury returns remaining stable, but credit issues suffering losses. Investors have become increasingly nervous about the growth prospects of the economy, as well as the timetable for an interest rate increase by the Fed. Within this environment, the 10-year U.S. Treasury yield ended the month at 2.10%, up five basis points from the 2.05% level of April 30th. Broad-based fixed-income indices were lower in May, with the Barclays U.S. Aggregate Bond Index declining -0.2% for the month. Global fixed-income markets underperformed again after gaining ground the prior month, as the Barclays Global Aggregate ex-U.S. Index slumped -3.0%. Intermediate-term corporate bonds were lower, as the Barclays U.S. Corporate 5-10 Year Index fell by -0.3%. The Barclays U.S. Corporate High Yield Index posted a +0.3% advance. Municipals were weak for the second month in a row, falling by -0.3% in May.

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