Monthly Economic Update May 2013
Dismissing the potential of a spring economic swoon and the adage to sell in May, investors pushed both domestic stocks, and margin balances, to new all-time highs during May. Following suit, high yield debt yields also fell below 5% for the first time in history. Capital raised through initial public offerings is on pace for the best year since 2007, stock funds have had their largest inflow of new money in six years, and 74% of professional investors identified themselves as either bullish or very bullish in a recent Barronâ€™s poll.
Exuberance diminished, however, in the final third of the month. A contraction in Chinese manufacturing intensified global growth concerns and tripped up the meteoric rise of the Japanese stock market that launched last November. U.S. monetary policy also went under a microscope following suggestions by Bernanke that the Fed may back off of bond buying in coming meetings. On this news, bonds weakened, capital market volatility rose, and the dollar rallied.
There are certainly bright spots in the domestic economy. The housing recovery continues, auto sales remain brisk, and energy production growth has been extraordinary. That being said, expectations for the Fed to back off the accelerator in the near-term seem premature. Manufacturing is showing marked weakness â€“ nearly worldwide â€“ and strength in the dollar will both slow growth and put further downward pressure on an already diminished rate of inflation. Furthermore, rampant beggarthy- neighbor currency devaluations across the globe will magnify all of the above. Lastly, the Fed has expressed concern about the impact of fiscal constraint (tax increases and sequestration cuts) and considers the labor market far from healthy.
Mayâ€™s Economic Releases
The S&P 500 gained 2.3% for the month and is now up 15.4% for the year. Developed international equity markets, as defined by the MSCI EAFE index, were down 2.4% in May while the MSCI Emerging Markets index lost 2.6%. Absent significant dollar strength during the period, both indices would have posted gains. Year-to-date, international developed and emerging markets have returned 7.9% and -3.4%, respectively.
In the fixed income market, the Barclays U.S. Aggregate index lost 1.8% for the month, and the yield on the 10-year U.S. Treasury bond spiked 46 basis points to end at 2.16%. For the year, the Barclays U.S. Aggregate is down 0.9%. High yield credit spreads tightened in the first third of the month, but gave back gains to end slightly wider. The Barclays High Yield index lost 0.6% in May and is up 4.1% so far this year. International bonds lost 3.8% for the month and are now down 5.7% for the year-to-date. As with equities, dollar strength has been a drag on international fixed income returns. Lastly, the Dow Jones UBS Commodity index was down 2.2% in May, and the Dow Jones U.S. Real Estate index lost 6.5% for the month.
This commentary was written by Robert W. Lamberti, CFA who serves as VP of Investments for Summit Financial Resources, Inc. 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600, Fax: 973-285-3666. Source of performance: MorningstarÂ®. Indices are unmanaged and cannot be invested into directly. The investment and market data contained in this newsletter is not an offer to sell or purchase any security or commodity. Standard & Poorâ€™s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The MSCI EAFE and Emerging Markets Indexes were created by Morgan Stanley Capital International (MSCI) and designed to measure equity market performance in global developed and emerging markets, respectively. The Barclays Aggregate Bond Index is a market capitalization-weighted index comprised of government securities, mortgagebacked securities, asset-backed securities, corporate securities, and a small number of foreign bonds traded in the U.S. It is used to represent the universe of bonds in the domestic market. REITs, Real Estate Investment Trusts, are securities that invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, however, may have liquidity constraints. Past performance does not guarantee future results. Information throughout this Newsletter, whether stock quotes, charts, articles, or any other statement or statements regarding markets or other financial information, are obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the reader. To unsubscribe from this investment newsletter please reply to this email with â€œunsubscribeâ€ in the subject. Opinions expressed are subject to change without notice and are not intended as investment advice or a guarantee of future performance. Consult your financial professional before making any investment decision.