Total Returns (%) as of May 31, 2019
|Fixed Income||YTD||1 Mo||3 Mo||1 Yr||3 Yrs||5 Yrs||10 Yrs|
|U.S. Large Cap||10.74||-6.35||-0.67||3.78||11.72||9.66||13.95|
|U.S. Small Cap||9.26||-7.78||-6.64||-9.04||9.75||6.71||12.84|
May broke the positive trend this year as all major equity markets ended the month meaningfully in the red. The S&P 500 retreated 6.35% while small caps descended further, down 7.78%. Both developed and emerging international equities declined 4.80% and 7.26% respectively. Emerging markets were negatively impacted more substantially as a result of increased trade tensions. In fixed income, high yield bonds were the lagging asset class, receding 1.19%, as credit spreads widened in consequence of a flight to quality. Investment grade and global bonds offered a glimmer of light, up 1.78% and 1.33%, respectively. The market performance reversion was predominantly caused by increased anxieties concerning international trade. Negotiations between the U.S. and China did not go as well as desired and the news of escalating tariffs on Mexico further stressed the equity markets.
According to the Federal Reserve Bank of St. Louis, exports account for approximately 14% of U.S. gross domestic product. This seemingly small amount may appear to insulate our economy and bring comfort to some; however, large cap stocks represent the majority of the U.S. equity market and earn almost half of their sales abroad.
Trade tensions have also impacted CEO confidence. As reported by The Conference Board, “CEOs’ assessment of current global conditions remains pessimistic. Sentiment declined moderately for the US and is now in slightly negative territory.” CEOs have the ability to make significant decisions that can have an impact on the U.S. economy as a whole.
In the U.S., real gross domestic product (GDP) increased at an annual rate of 3.1 percent in the first quarter of 2019 according to the "second" estimate released by the Bureau of Economic Analysis. The revised estimate is based on more complete source data than were available for the "advance" estimate issued last month and reflects downward revisions to nonresidential fixed investment and private inventory investment and upward revisions to exports and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, were revised up; the general picture of economic growth remains the same.
The Federal Open Market Committee left rates unchanged in May and indicated that they “continue to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.” The CME Group’s FedWatch Tool forecasts a 99% probability of a rate cut by the end of this year.
While the pullback was significant, it could have been more severe had the economic news been worse. Despite the fact that the economy is slowing, it is still expected to keep growing. May was a thorny month and we expect that volatility will continue. The underlying fundamentals are still relatively positive. We are hopeful that progress will be made with the trade talks which would allow the extended bull market to continue.