THE MONTH IN BRIEF Investors did not exactly “sell in May and go away” – the S&P 500 gained 1.53% last month. Oil prices settled into a sweet spot of sorts; they were high enough to soothe analysts, but not so high as to portend gas price spikes for consumers. Fundamental indicators pointed to an economy leaving its first-quarter doldrums behind; the real estate market looked especially hot. Hiring moderated, but retail sales, personal spending, and inflation picked up. It was enough to stir questions about an interest rate hike, and certain Federal Reserve officials publicly entertained that possibility.(1)
DOMESTIC ECONOMIC HEALTH The May economic data stream brought many signals of a healthier economy. April brought a 1.0% jump in consumer spending, the largest monthly advance since August 2009. In accordance with that development, retail sales surged 1.3% in April.(2,3)
Service sector growth appeared to pick up as well in the year’s fourth month: the Institute for Supply Management’s non-manufacturing purchasing manager index came in at 55.7, 1.2 points higher than its March reading. ISM’s manufacturing PMI dipped 1.0 points in April, but still showed sector expansion with a 50.8 mark. Reports from the federal government showed American industrial output up 0.7% for April and hard goods orders accelerating 3.4%.(3,4)
The Consumer Price Index rose a notable 0.4% in April, in contrast to 0.1% in March; the annualized gain for the core CPI through April was 2.1%. The country’s primary wholesale inflation gauge exhibited roughly the same trend – the Producer Price Index advanced 0.2% for April after a 0.1% March retreat.(3)
First-quarter economic growth was adjusted upward by the Bureau of Economic Analysis. Near the end of May, the BEA said the economy expanded 0.8% in Q1, better than its initial estimate of 0.5%.(3)
One consumer confidence survey showed improvement in May, but another did not. The Conference Board’s monthly index dipped for a second straight month to its lowest reading since November – a mark of 92.6, 2.1 points lower than its April reading. The University of Michigan’s consumer sentiment index, on the other hand, ended May at 94.7.(2,3)
Investors and economists analyzed the Department of Labor’s new jobs report at length early in the month. American payrolls showed a gain of just 160,000 jobs in April; did that telegraph weakness in the labor market, or an economy reaching full employment? While opinions were divided, statistics showed unemployment unchanged at 5.0% with underemployment (measured by the U-6 rate) ticking down to 9.7%. Yearly wage growth was a bright spot, reaching 2.5% in April.(5)
As May ended, there was a real sense that the health of the economy had improved from the first quarter, and three Federal Reserve officials (Janet Yellen, John Williams, and Eric Rosengren) had made some hawkish remarks about the merits of raising interest rates. In a May 27 conversation at Harvard University, Yellen stated that “probably in the coming months such a move would be appropriate.”(6)
GLOBAL ECONOMIC HEALTH Would the United Kingdom vote to leave the European Union in June? A pair of Guardian polls found public opinion leaning 52%-48% in favor of a “Brexit.” Prime Minister David Cameron and Chancellor of the Exchequer George Osborne were adamantly against the move. Cameron called it “the self-destruct option” for the U.K. economy while Osborne saw a “DIY recession” ahead if voters approved a split from the EU in a June 23 national referendum. While the idea has gained popularity among the electorate, the U.K. treasury has forecast 520,000 lost jobs and a 3.6% dent to 2018 GDP as potential consequences. In the worst-case scenario, the Treasury sees roughly a 6% hit to the U.K.’s GDP and a 10% drop in its home prices.(7,8)
Eurostat showed the euro area jobless rate at 10.2% for April, the lowest level of unemployment seen since August 2011 and down from 11.0% a year earlier. Annualized inflation for the euro area was still negative (-0.2%) in April.(9)
As May ended, data showed India retaining its rank as the world’s fastest-growing large economy. Its GDP for the first quarter was 7.9%, following 7.6% growth in 2015. Official PMIs from China were mildly encouraging. The April manufacturing PMI came in at 50.1, counting as a second consecutive month of expansion; the non-manufacturing PMI declined from 53.8 to 53.5.(10,11)
WORLD MARKETS Global stock performance was all over the map in May. Brazil’s Bovespa had it hardest, dropping 10.09%; Russia’s RTS index sank 4.92%. At the other end of the spectrum, India’s Sensex rose 4.14% while Japan’s Nikkei 225 gained 3.41%. Australia’s ASX 200 picked up 2.41%; Germany’s DAX, 2.23%.(1)
While the MSCI World index managed an 0.23% May rise, the MSCI Emerging Markets index fell 3.90% for the month.)13)
COMMODITIES MARKETS May brought another big gain for oil. WTI crude futures rose 6.33% for the month, settling at $48.89 on the NYMEX on May 31. Other energy futures posted advances as well: natural gas, 6.68%; heating oil, 7.71%; unleaded gas, 0.31%. Corn gained 3.58%; soybeans, 5.63%; sugar, 7.22%; coffee, 0.66%; and cotton, 0.39%; on the other hand, cocoa lost 6.15%, and wheat lost 2.71%.(14)
The key metals went firmly south. Gold slipped 6.05% for the month on the COMEX; silver, 10.55%. They, respectively, ended May at $1,215.40 and $16.02. Platinum lost 8.75% on the month; copper, 8.11%. The U.S. Dollar Index headed north, rising from its April 29 close of 93.08 to a May 31 settlement of 95.83.(14,15)
REAL ESTATE Simply put, April was a terrific month for the housing sector. Resales increased by 1.7% according to the National Association of Realtors, taking the annualized sales pace higher still. New home buying improved 16.6% in April to its hottest pace in eight years. March’s S&P/Case-Shiller 20-city composite home price index showed a 5.4% yearly advance, meaning home prices were rising more than twice as fast as inflation.(16,17)
Two barometers of present and future housing activity also looked good. The NAR’s pending home sales index rose a healthy 5.1% for April to a peak unseen since February 2006. The Census Bureau announced a 6.6% gain for housing starts (but also a 3.6% retreat for building permits).(3,16)
Freddie Mac’s April 28 and May 26 Primary Mortgage Market Surveys showed very little change in mortgage rates. The average interest rate on a 30-year FRM went from 3.66% to 3.64%. Average interest for the 15-year FRM stayed put at 2.89%, while the 5/1-year ARM grew a touch more expensive, with the average interest rate rising to 2.87% from 2.86%.(18)
LOOKING BACK…LOOKING FORWARD May was a very good month for the broad stock market, and the Nasdaq set the pace among the major indices. The tech-heavy benchmark advanced 3.62% during the month to a May 31 close of 4,948.05. The Russell 2000 performed well, settling at 1,154.79 after a 2.00% rise. The S&P 500’s 1.53% gain led to a May 31 settlement of 2,096.96. Lagging behind, the Dow only rose 0.08% for the month to 17,787.20. Fear was in check, as the CBOE VIX ended May 9.62% lower at 14.19.(1,22)
May turned out to be much better for stocks than many investors anticipated. Is it unreasonable to expect further gains in June, given the chance of the Fed raising rates and the United Kingdom voting its way out of the EU? The market may end up pricing that rate hike in if the May jobs report is especially strong and Fed officials deliver further hints that a move is just ahead. News of a “Brexit” might do far greater harm to global markets. Investors will also want to keep an eye on the European Central Bank’s latest policy statement, due in the first week of June. In short, this may be a month offering the chance for appreciable upset as well as appreciable upside. In the best-case scenario, it surprises us as nicely as May did.
UPCOMING ECONOMIC RELEASES: Here is the roll call for the rest of June...April wholesale inventories (6/9), the initial June University of Michigan consumer sentiment index (6/10), May retail sales and April business inventories (6/14), a Federal Reserve interest rate decision, the May PPI and the Fed’s report on May industrial production (6/15), the May CPI (6/16), May groundbreaking and building permits (6/17), May existing home sales (6/22), May new home sales (6/23), the University of Michigan’s final June consumer sentiment index and May durable goods orders (6/24), the final federal government estimate of Q1 GDP, the April S&P/Case-Shiller home price index and the June consumer confidence index from the Conference Board (6/28), and May pending home sales, the May PCE inflation gauge and May consumer spending (6/29).
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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The Europe Dow measures the European equity markets by tracking 30 leading blue-chip companies in the region. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. The FTSE MIB (Milano Italia Borsa) is the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain's principal stock exchange. The RTS Index (abbreviated: RTSI, Russian: Индекс РТС) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange. The ISEQ Overall Index is a capitalization-weighted index of all official list equities in the Irish Stock Exchange, excluding U.K.-registered companies. Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Asia Dow measures the Asia equity markets by tracking 30 leading blue-chip companies in the region. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange from Standard & Poor’s. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The Mexican IPC index (Indice de Precios y Cotizaciones) is a major stock market index which tracks the performance of leading companies listed on the Mexican Stock Exchange. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Dow Jones Americas Index measures the Latin American equity markets by tracking 30 leading blue-chip companies in the region. The Global Dow is a 150-stock index of corporations from around the world created by Dow Jones & Company. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. 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