Market Commentary: Market Recap

Market Update for the Month Ending May 31, 2016

A strong end to a weak month
After dropping between 1 percent and 2 percent in mid-May, U.S. markets rallied at month-end. The Dow Jones Industrial Average finished the period up 0.49 percent, the S&P 500 Index gained 1.80 percent, and the Nasdaq did better yet, rising 3.62 percent.

The good performance was driven by unexpectedly positive corporate earnings. Although down 6.7 percent, earnings declined less than the 8.8-percent drop expected. Technical factors also remained supportive for U.S. markets, with all three major indices ending May well above their 200-day moving averages.

Developed international markets didn’t fare as well, experiencing a similar pullback during the month but a smaller rally at month-end. The MSCI EAFE Index was down about 2 percent in mid-May but finished with only a 0.91-percent loss. Technical factors also improved, and the index closed slightly above its 200-day moving average.

Emerging markets, reflected in the MSCI Emerging Markets Index, were hit harder but recovered from a 7-percent loss mid-month to decline “only” 3.71 percent at month-end. Technically, the index moved back above its 200-day moving average, though barely.

Broad fixed income markets had a weak May, with the Barclays Capital Aggregate Bond Index reporting a small 0.03-percent gain. High-yield, as represented by the Barclays Capital U.S. Corporate High Yield Index, performed well, rising 0.62 percent.

Another weak first quarter for the U.S. economy, but signs of spring
The gross domestic product report, released at month-end, showed that the U.S. economy had grown marginally faster, 0.8 percent, in the first quarter of 2016 than the 0.5-percent uptick initially estimated. May’s economic data was mixed.

Weak numbers came from manufacturing and capital investment, with the ISM Manufacturing survey indicators still hovering between expansion and contraction. In addition, orders for durable goods and capital equipment continue to run below expectations—flat or down over the previous 12 months.

Offsetting this was substantial improvement in the service sector and consumer demand, which each constitute a much more significant share of the economy. The ISM Nonmanufacturing survey rose more than expected, and the most forward-looking component, new orders, hit a six-month high. Similarly, in April, as announced in May, consumer spending rose by the most in two years. Housing sales also surprised to the upside, with new home sales particularly strong, as illustrated in Figure 1.

Figure 1. New Single-Family House Sales, Monthly Percentage Change,
2012–Year-to-Date 2016

Consumer spending growth was driven by continued expansion in employment. Although job growth declined to 160,000, average hours worked in April rose. Wage growth also continued, up 2.5 percent over the past year.

Central banks and interest rates
The most recent Federal Open Market Committee meeting minutes came as a surprise, announcing that the economy was considered to be at full employment and inflation moving in the right direction. This view was accompanied by a clear statement that rate increases were quite possible. Though positive for the economy, the implications for markets were mixed. With that said, continued stimulus by foreign central banks is likely to constrain rate hikes.

International risk remains
Internationally, risks remain. The most immediate concern is the June 23 referendum in the United Kingdom regarding whether to leave the European Union. Should the referendum pass—and polls indicate that it is possible though not likely—significant market turbulence is possible. Another concern in Europe is the return to center stage of negotiations over Greek debt.

The other major international risk is China. Growth continues to disappoint, as China’s government continues to increase stimulus. Concerns are also increasing about China’s ability to manage its economy and, especially, its currency.

A return to “almost” normal
With the U.S. economy on the mend and the bulk of risk coming from abroad, we seem to be returning to normal. But normal doesn’t mean that risks have vanished. Cautious optimism remains the appropriate outlook for investors.

As always, maintaining a big-picture perspective and diversified portfolio is the best way to meet financial goals. Enjoy the current improvements but stay focused on the long-term horizon rather than on intermediate events.

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. The Barclays Capital U.S. Corporate High Yield Index covers the USD–denominated, non–investment–grade, fixed–rate, taxable corporate bond market. Securities are classified as high–yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below.

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