Market Commentary: Market Recap

    Market Update for the Month Ending May 31, 2015

    A weak end to a strong month
    U.S. financial markets were strong in May, despite weak economic reports. After rising between 2 percent and 3 percent at mid-month, stocks dropped at month-end over growing concerns about Europe and Greece but still registered positive returns. All major U.S. equity markets posted gains, with the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq up 1.35 percent, 1.29 percent, and 2.60 percent, respectively. Technical factors were supportive, with all three major indices finishing May well above their 200-day moving averages.

    May’s good performance was driven by unexpectedly positive corporate earnings news. Although 0.7-percent earnings growth for the first quarter is not exciting, expectations had been for a nearly 5-percent decline. Moreover, per FactSet, excluding the energy sector, company earnings growth was 8.5 percent instead of 0.7 percent. Still, revenues declined, down 2.9 percent.

    The MSCI EAFE Index was up almost 3 percent in mid-May but finished with a 0.51-percent percent loss. Technical factors remained supportive, however, with the index closing well above its 200-day moving average. The MSCI Emerging Markets Index was hit harder, moving from a 1-percent gain mid-month to a 4.16-percent loss at month-end. Its technical picture is weaker as well, approaching a worrisome level.

    The Barclays Capital U.S. Aggregate Bond Index lost 0.24 percent in May. Weakness in the fixed income universe was widespread, as shown in the chart.

    Market Update 2015

    Another first-quarter “snowdown” for U.S. economy
    The gross domestic product report released at month-end, showing that the U.S. economy had shrunk 0.7 percent in the first quarter of 2015 instead of growing slightly, was consistent with last year’s experience. In addition to unseasonable weather throughout the country again, a strike at West Coast ports hit supply chains across the nation.

    Despite the short-term nature of the disruptions, a spring recovery is proving slower to appear this year than last. Still, job growth is strong, with a gain of 223,000 jobs in April, and the unemployment rate is down to 5.4 percent.

    Consumer confidence has been mixed, with some surveys showing declines and others gains. But personal income growth has been strong, indicating that the financial situation of the average consumer is improving.

    Central banks and interest rates
    According to the minutes of their last meeting, members of the Federal Open Market Committee consider the slow first quarter to be due to temporary factors, signaling that continued growth is likely. Nevertheless, potential interest rate increases are now expected for the second half of 2015, at the earliest.

    International risk remains
    At the international level, risks remain. Europe is the focus, with Greece approaching June deadlines for repaying substantial sums to the International Monetary Fund and European Central Bank—repayments that it cannot make. Although the probable outcome is a new deal, time is running out.

    Two longer-term risks resurfaced in May. The first is that the British government is now committed to a referendum on membership in the European Union (EU). The success of the anti-EU parties in Britain in demanding such a referendum should encourage this possibility in other countries. Moreover, although the European recovery continues, unemployment is at depression levels in many EU countries. Expect more uncertainty regarding Europe through the rest of 2015.

    The second major risk is China. Growth continues to disappoint, and its government continues to increase stimulus. China has also become much more aggressive, expanding installations in what the U.S., for one, considers international waters in the South China Sea. This has led the U.S. to send air and naval forces into the contested areas and Japan to consider a more aggressive defensive stance.

    Slow growth continues, on a sustainable basis
    With the U.S. economy on the mend and the bulk of the financial risk coming from international issues, it seems as if we are moving back to normal. Normal does not mean, however, that risks have disappeared. Greece and China represent immediate risks, and although the U.S. recovery is expected to continue, that is neither guaranteed nor something that will go on forever. Cautious optimism remains the wise outlook for investors. As always, a long-term perspective and diversified portfolio are the best ways to meet your goals.

    All information according to Bloomberg, unless stated otherwise.

    Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.

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