Global equity markets were up 0.9% during May; however, the regional equity performance underpinning this cumulative performance was quite varied. While U.S. equities were up 2.4% in the month, international-developed markets were down 0.5%. With the USD appreciating strongly in the month (+2.1%), emerging market stocks were down 2.2%.
Volatility in global commodity and equity markets was likely driven by political events and macro data. For instance, Italy and Spain both struggled through attempts to form new governments or oust current ones, causing their stock markets to drop over 9% and 6%, respectively. Political drama in the United States seemed to have a greater impact outside of the United States than inwardly. Trump pulled out of the Iran nuclear accord on May 8th. This led to crude oil prices to continue to climb higher on fears that new sanctions against Iran would restrict the country’s ability to export oil. Later in the month, the Trump administration announced it would put trade tariffs against China on hold.
Early in the month, the U.S. Fed announced it would leave its policy unchanged, but continued pointing toward gradual rate hikes. In spite of this, on signs of U.S. economic strength, U.S. 10 year treasury yields reached 3.11% during the month – their highest level since 2011. The overall U.S. investment grade bond market appreciated 0.4% in May while global fixed income declined 0.8%.
Data supporting weakness in the U.S. 10 year treasury included payrolls rising by 223,000 in May (beating consensus estimates of 188,000), which pushed the U.S. unemployment rate to an 18-year low of 3.8%. Average hourly earnings rose 0.3%, translating into an annualized gain of 2.7%. Earnings data also supported a strong overall economic backdrop as nearly 80% of companies that had reported Q1 results surpassed expectations. Industrial production in the U.S. also increased in the month by 0.7%, which matched the gain announced in the prior month.
U.S. 10Y Treasury Yield - Last 10 Years
U.S. Unemployment Rate - Last 20 Years
Short-Term Market Outlook
Our economic outlook at the end of the month was at a one year low point, as exhibited by our Leading Indicator Index. This position was driven primarily by our measurement of global trade, which indicated a substantial slowdown. Secondarily, our measurement of manufacturing data was also negative as was data on the average number of hours worked. In turn, this negative sentiment lowered our expectation that stocks will outperform bonds – our relative preference between those assets was exactly neutral at month end. Similar to our Leading Indicator Index level, this stock-bond position represented a 12-month low point in the forecast. Our stock-bond forecast for European assets was in favor of bonds. This model was impacted by the global stock-bond model referenced above but the preference for bonds was also driven by European leading indicators signaling economic contraction.
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Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI Daily TR Gross EAFE USD Index; U.S. Equities represented by the S&P 500 Total Return Index; Japanese Equities represented by the MSCI Daily TR Gross Japan Local Index; Italy Equities represented by the MSCI Italy Index (MXIT index); Spain Equities represented by MSCI Spain Index (MXES Index); U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; U.S. Treasuries represented by the Bloomberg Barclays U.S. Long Treasury USD.
QSCR 18159 (June 2018)