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Monthly Market Update - May 2014

June 13, 2014

Investors who listened to the “sell in May and go away” advice missed out! Global markets provided substantial returns, even as investors digested mixed corporate earnings and a decline in first quarter U.S. real GDP. The S&P 500 reached new all-time highs, rallying 2.3% for the month. U.S. small stocks, up 0.8%, continued to lag U.S. large cap stocks. International developed stocks did well (up 1.6%), while a rebound in China contributed to a considerable 3.5% gain in emerging markets, advancing the index into positive territory for the year. Even fixed income securities posted above-average returns. Inflation-protected bonds (TIPS) led the way, gaining 2.1%, and international bonds climbed 0.7%. On the alternatives side, commodities disappointed investors with a 2.9% decline, but lower interest rates helped fuel a 2.7% gain in Global REITs. Overall, despite less than ideal economic data, market optimism remains high.

Economy

  • The second estimate of first quarter U.S. real GDP growth came in at -1.0%, which was weaker than the first estimate of 0.1%.  While disappointing, the shortfall can be attributed at least in part to the unusually severe winter weather. A rebound in GDP growth is expected next quarter as drivers of growth such as personal consumption, housing, and exports should improve as weather returns to seasonal norms and job growth continues to strengthen.

  • Inflation (CPI) for the month of April increased 0.3%. The year-over-year inflation rate climbed to 2.0%, now in line with the Federal Reserve’s long-term inflation target of 2%.

  • Housing starts rose 13.2% from the month prior to an annual level of 1.1 million. This pace is in range of the estimated 1.0 to 1.5 million needed to keep the housing market on pace with population growth and replacement housing.

  • Consumer confidence rose slightly in May to 83, up from 81.7.  The index is near its highest point since 2008. A solid labor market has contributed to the more upbeat consumer assessment of current and future conditions. Employers added 217,000 jobs during the month, while the unemployment rate remained steady at 6.3%.

U.S. Equity

  • The S&P 500 Index rose 2.3% driven by market optimism. All sectors posted positive returns, except for utilities, which declined 1.0%. U.S. large stocks continued to outperform small stocks (Russell 2000 Index), which rose 0.8% for the month and are down 2.0% for the year. However, U.S. small value stocks (MSCI U.S. Small Value Index) have fared much better, and are up 2.4% year-to date.

International Equity

  • Developed international stocks (MSCI EAFE Index) performed well, but were outpaced by U.S. stocks. International large cap stocks gained 1.6%, and international small cap stocks gained 1.3%.  Except for Italy, which fell 0.8%, all developed international markets made positive gains.

  • Emerging markets (MSCI Emerging Markets Index) rose 3.5% for the month. China revived the index with a 4.7% gain and brought the index into positive territory for the year. Russia also rebounded strongly with a 12.2% gain, but still remains the worst performer of the emerging markets, down 10.1% year-to-date.

Fixed Income

  • The 10-year Treasury yield fell to 2.54%, down nine basis points from the month prior. The Fed continued their path of tapering bond purchases by reducing the monthly amount by $10 billion as planned. Monthly bond purchases now stand at approximately $45 billion.

  • The Barclays U.S. Intermediate Government/Credit Bond Index rose 0.8%, and international bonds (JPM GBI Global Ex US Hedged Index) rose 0.7%. TIPS gained 2.1% for the month, and are now up 5.5% year-to-date, outperforming the S&P 500 Index.

Alternatives

  • Commodities (DJ UBS Commodity Index) fell 2.9%. Grains dragged down the index with a sharp decline of 8.0%, and precious metals declined 3.5%.

  • The S&P Global REIT Index continued to rise, gaining 2.7% for the month and is now up an impressive 14.2% year-to-date. Since the Fed has assured interest rates will not rise substantially over the next few years, the perceived downside risk for REITs is relatively low, and this has contributed to their strong performance.

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar, Standard and Poor’s, Wells Fargo, Yahoo! Finance

 

Market Returns Chart - One Month as of 5/31/2014
Market Returns Chart - Year-To-Date as of 5/31/2014
Market Returns Chart - One Year as of 5/31/2014

Source: Morningstar Direct. Indices used in above graphs: S&P 500 Index, U.S. Large Value-MSCI U.S. Prime Market Value Index, U.S. Small-Russell 2000 Index, U.S. Small Value-MSCI U.S. Small Value Index, Int'l Large-MSCI EAFE Index, Int'l Large Value-MSCI EAFE Value Index, Int'l Small-S&P EPAC Small Index, Int'l Small Value-S&P EPAC Small Value Index, Emerging Mkts-MSCI Emerging Markets Index, World Stock Index-MSCI All Country World IMI Index, TIPS-Barclays Gbl Infl Linked US TIPS Index, Short-Term Bonds-Ibbotson 1 Yr Treasury Const Mty Index, Interm-Term Bonds-Barclays Interm-Term Govt/Credit Index, Foreign Bonds-JPM GBI Global Ex US Hdg, Global REITs-S&P Global REIT Index, Commodities-DJ UBS Commodity Index.

Past performance is historical and does not guarantee or indicate future results. Index returns assume reinvestment of all distributions and unlike mutual funds, do not reflect fees or expenses. It is not possible to invest directly in an index. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

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