Let’s take a look back at May.
For the second straight month, May saw equity (stock) markets around the world continue to rise.
· Domestically, the 3 major indices rose on an average of 5.44% for the month, with the technology-laden Nasdaq composite leading the way with a 6.89% gain.
· Internationally, the developed markets rose a solid 4.35%, while the emerging markets rose slightly by 0.79% (both measured by their corresponding MSCI index.)
· From a fundamental perspective, we continue to see a disconnect between what is happening in the markets and present economic conditions. Yet from a technical perspective, we saw two of our indices (S&P 500 and Nasdaq) cross back over their 200-day moving average, which is typically an optimistic signal.
Fixed-income (bond) markets participated in the May rally as well, with high yield bonds providing the most growth at 4.41%. The bond market continues to be propped up by low interest rates and a supportive Federal Reserve.
As we mentioned above, we have observed a disconnect between the equity market valuations and the current state of our economy. Part of the reason for the disconnect is the appearance that the worst of the economic damage is probably behind us. Equity markets are already looking ahead to what appears to be a robust end to the year. In May, we saw an unexpected decline in unemployment claims, a large jolt in hiring (though it is more likely from “re-hiring”) and a modest increase in consumer confidence. Consumer consumption was what carried our economy prior to the global shutdown and will likely be key to getting things back on track as we begin to re-open the economy. We are already seeing glimpses of this in states where the restrictions are being lifted.
We wouldn’t be able to get through a recap of May without touching briefly on what started this whole “deep freeze” to begin with: the spread of the coronavirus. The news is good - we continue to see a slowing in the spread of the virus. We have significantly increased our testing capabilities, and most notably, did not see significant spikes towards the month-end as several states began their reopening process. This has led to high hopes that a second wave may be diminished, or possibly avoidable altogether.
So what lies ahead?
While we did not see a surge at month end, the summer months bring more fellowship and socialization, so there is still a potential for a second wave and another shelter-in-place order. The end of the month was also mired with rising social unrest and escalating trade tensions between the US and China, both of which could lead to volatility ahead. Investors currently appear to be pricing in a best-case-scenario in our recovery efforts as we head into the summer (which is typically a quieter time in the markets), so any hiccup in those efforts could rattle the markets and we could see an increase in volatility as well. As there are still more unknown catalysts then known right now, maintaining a well-diversified portfolio continues to be the best route. When markets see a lot of momentum in one direction or the other investors often have FOMO (fear of missing out.) This is not the time to abandon your path forward, as your portfolio is designed to accomplish your goals and timelines. Please reach out to us if concerns still remain.
Ryan Flanders, CFA