Following declines early in the month, the S&P 500 Index rallied and turned in solid results for May. Despite some late month weakness and elevated capital market volatility spurred by political uncertainty in Italy and new tariff announcements by the U.S., May capped off the second consecutive month of gains for the S&P 500, pushing it back into positive year-to-date territory. Small capitalization stocks, as measured by the Russell 2000 Index, enjoyed even better results and hit a new all-time high during the month. While U.S. equities made strides in May, international equities struggled. A variety of pressures, including ongoing concerns about tariffs between the U.S. and other countries and political turmoil in Italy weighed on global markets late in the month. A stronger U.S. dollar and higher U.S. interest rates for most of the month were among the headwinds faced by emerging market stocks in May. The S&P 500 gained 2.41% for the month, which pushed year-to-date results into positive territory with a gain of 2.02%. Other broad U.S. equity indices advanced in May as well, including the Dow Jones Industrial Average (+1.41%), the Russell 1000 Index (+2.55%) and the Russell 3000 Index (+2.82%). Growth stocks (as measured by the Russell 1000 Growth Index) once again dominated value stocks (as measured by the Russell 1000 Value Index) with gains of 4.38% and 0.59%, respectively. As previously mentioned, the Russell 2000 Index stood out in May with a gain of 6.07%. With the exception of the Dow Jones Industrial Average and the Russell 1000 Value Index, the other U.S. indices now enjoy positive year-to-date returns. In contrast, the MSCI ACWI ex US Index, a measure of developed international equities, was off 2.31% and the MSCI Emerging Markets Index declined by 3.75% in May and those monthly declines pushed them into negative territory year to date.

The second half of May was rather dramatic for bonds and interest rates. The yield on the 10-year U.S. Treasury broke convincingly above 3% in the middle of the month and traded above that mark for several consecutive days. At its top, the yield eclipsed 3.1%, the highest level since 2011. However, turmoil in Italy in the latter part of May triggered a flight to quality and U.S. Treasuries rallied late in the month. By the end of May, the yield on the 10-year U.S. Treasury had slipped to about 2.83%. (At the same time, the yield on 10-year Italian government bonds briefly went from about 1.8% at the beginning of May to above 3% late in the month and settled around 2.7% by month’s end as investors punished Italian bonds.) The late-month rally in U.S. Treasuries and declines in U.S. interest rates helped most areas of the domestic fixed income markets to turn in gains for May with the notable exception of high yield bonds, which were fractionally lower. The Federal Open Market Committee (FOMC) met in May, marking the second meeting under the leadership of new Chairman Powell, who took over from Janet Yellen in February. While no change in policy rates was made as anticipated, the June meeting is expected to usher in the second increase to policy rates in 2018. Market observers will continue to watch the actions of the Federal Reserve (“Fed”) closely, especially as the Fed continues on its current rate-hike cycle. We continue to expect a slow and measured rate-hike cycle from the Fed, as has been the case since it began raising rates in December 2015. So far, the Fed has increased rates only six times in the 20 meetings that occurred in this time frame. With this backdrop, most areas of fixed income advanced in May. The widely followed Bloomberg Barclays U.S. Aggregate Bond Index gained 0.71%, municipal bonds advanced 1.15%, but high yield bonds slipped modestly lower, down 0.03%. While negative, high yield bonds still performed relatively better than most other fixed income categories year to date.

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The S&P 500 Index added to April’s gains with additional gains in May, pushing this widely followed index into positive year-to-date territory. Despite late-month stress arising from political turmoil in Italy and flaring of tariff concerns in the U.S., domestic equities were able to post solid gains for the month. The Russell 2000 Index, a measure of small capitalization stocks, performed even better during May and achieved a new all-time high. While U.S. equities gained in May, international equities struggled. A stronger U.S. dollar, higher interest rates, turmoil in Italy and ongoing headlines concerning tariff barriers were among the factors that weighed on international equities during the month. Overall, this was a month U.S. equities clearly outperformed their international counterparts. Most major U.S. stock indices, including the S&P 500, Dow Jones Industrial Average, NASDAQ, Russell 1000, Russell 2000 and Russell 3000 posted gains for May. The Russell 2000 Index hit a new all-time high during May and stood out among the major equity indices with some of the strongest monthly gains. International stocks struggled in May with both developed international and emerging market equities declining for the month.


The notable rise in 10-year U.S. Treasury yields during much of May was countered by a late-month flight to quality which led to a rally in Treasury bond prices and declining yields. After ending April above 2.9%, the yield surpassed 3.1% during May before closing the month around 2.83%. Overall, this decline in yields led to a positive backdrop for most pockets of fixed income for the month. One notable exception was high yield bonds, which slipped marginally lower during May. The Bloomberg Barclays U.S. Aggregate Bond Index, U.S. Treasuries, municipals and investment grade corporate bonds all gained for the month. Despite a modest decline in May, high yield bonds, while negative, have still performed relatively better than most other fixed income categories on a year-to-date basis.


For the most part, economic data slowed in April from March’s levels, but the economy remained in a growth mode. The ISM Manufacturing Index and the ISM Non-Manufacturing Index were both below expectations in April and lower than March’s level. However, both readings also remained comfortably above the 50 mark, which is the dividing line between expansion and contraction for these indices. The second reading of first quarter 2018 GDP was revised modestly lower to 2.2% from the first estimate of 2.3%. While this reading had been expected to stay at 2.3%, the second reading was still ahead of the original consensus estimate of 2.0% growth. Housing data in April was also lower than March’s levels, but housing starts and building permits continued to reflect a robust housing market. After disappointing in March, non-farm payroll additions improved in April but were below consensus estimates. On a positive note, the unemployment rate dipped to 3.9% when it had been expected to remain at 4.0%, and average hourly earnings rose at a modestly slower pace than expected. Year-over-year inflation readings through April were all below expectations with the exception of headline CPI, which came in as expected with a 2.5% annual increase. The Federal Open Market Committee met in early May and, as anticipated, kept policy rates unchanged.

Event Period Estimate Actual Prior Revised
Nonfarm Payroll Apr 193,000 164,000 103,000 135,000
Unemployment Apr 4.00% 3.90% 4.10%
ISM Manufacturing Apr 58.5 57.3 59.3
ISM Non-Manufacturing Apr 58 56.8 58.8
Retail Sales ex Auto & Gas Apr 0.40% 0.30% 0.30% 0.40%
Average Hourly Earnings YOY Apr 2.70% 2.60% 2.70% 2.60%
JOLTS Job Openings Mar 6,100,000 6,550,000 6,052,000 6,078,000
PPI MOM Apr 0.20% 0.10% 0.30%
PPI MOM ex Food & Energy Apr 0.20% 0.20% 0.30%
PPI YOY Apr 2.80% 2.60% 3.00%
PPI YOY ex Food & Energy Apr 2.40% 2.30% 2.70%
CPI MOM Apr 0.30% 0.20% -0.10%
CPI MOM ex Food & Energy Apr 0.20% 0.10% 0.20%
CPI YOY Apr 2.50% 2.50% 2.40%
CPI YOY ex Food & Energy Apr 2.20% 2.10% 2.10%
Industrial Production Apr 0.60% 0.70% 0.50% 0.70%
Housing Starts Apr 1,310,000 1,287,000 1,319,000 1,336,000
Building Permits Apr 1,350,000 1,352,000 1,354,000 1,377,000
New Home Sales Apr 680,000 662,000 694,000 672,000
Existing Home Sales Apr 5,550,000 5,460,000 5,600,000
Leading Index Apr 0.40% 0.40% 0.30% 0.40%
Durable Goods Orders Apr (P) -1.30% -1.70% 2.60% 2.70%
S&P CoreLogic CS 20-City YOY Mar 6.45% 6.79% 6.80% 6.76%
Personal Income Apr 0.30% 0.30% 0.30% 0.20%
Personal Spending Apr 0.40% 0.60% 0.40% 0.50%
GDP Annualized QOQ 1Q (S) 2.30% 2.20% 2.30%
Univ. of Mich. Sentiment May (F) 98.8 98 98.8
P = Preliminary, S=Second, F = Final
Source: Bloomberg

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