Fidelity Bank - Wealth Management
May 2019 Market Review
William J. Fennie III
In May, investors were gripped with the fear that the US-China trade war, tariffs on US Allies, and a global slowdown may last longer and be more pronounced than what optimistic investors thought early in the year. As a result of this renewed bleak outlook, US Stocks lost 6.35% in May, the first negative month this year and the second worst monthly return for May since 1962.
To find a safe haven, investors flocked to fixed income markets in May. The Bloomberg Barclay’s Aggregate Bond Index rose more than 1.78%. Treasuries were the best performing fixed income asset, advancing by 2.35% as investors fled riskier assets.
Fears of weaponized tariffs, Brexit, and a global slowdown were not unique to US markets. International Developed Market Equities lost 4.80% and Emerging Market Equities dropped 7.26%.
Market turmoil in May left 10 of 11 S&P 500 GIC sectors lower at month end. Real Estate, in large part to its cash flows, was the lone positive sector for the month, up 1.16%. From technical perspective, the S&P 500 finished the month below its 200-day moving average, one of the most popular technical indicators used to help analyze price trends. The metric is often considered a directional barometer help analyze long-term trends.
Small Cap Stocks got off to a great start in May advancing to a year-to-date high-water performance mark of 20.20% by May 3rd. From that point, Small Caps lost 9.09% by month end to bring their year-to-date total return to 9.26%. At one in February, Small Caps led their Large Cap peers by more than 6.30%. At the end of May, Small Caps trailed their Large Cap peers on a year-to-date basis by 1.47% (Russell 2000: +9.26%; S&P 500: +10.73%).
Dollar strength detracted returns from US investors in both Developed Markets and Emerging Markets. The Dollar Index, which measures the US Dollar vs Developed Market currencies, strengthened by about 28 basis points. The MSCI EAFE index lost 4.63% in local currency terms, and 4.80% in US Dollar terms. The MSCI Emerging Market Currency Index weakened by about 120 basis points vs the US Dollar in May. The MSCI Emerging Markets index gave up 6.60% in local currency, but the conversion to US Dollars increased that loss to 7.26%. The Brexit, trade war with China, and renewed talk of new tariffs on European countries, Mexico and Latin America continues to weigh on international returns. Chinese stocks fell more than 8.1%, Mexican stocks fell about 7.5% and European stocks fell about 7%, all in US dollar terms,
Demand for Treasuries boosted bond prices and sunk yields across all maturities. The benchmark 10-year rate sunk to 2.12% to end May. The 3-month to 10-year spread ended the month at negative 22 basis points, the most negative reading since 2007. As recently as 6 months ago, market participants were pricing in as many as 4 interest rate increases in 2019. So far, none have occurred. Now, market expectations reflect a 92% chance of an interest rate cut by the Federal Reserve by the December 2019 FOMC meeting.
US High Yield Bonds sold off by 1.19% in May as invertors sought safe asset classes. High Yield spread to 10 Year Treasury bonds increased 83 basis points from 3.62% at the beginning of the month to 4.45% by month end. High Yield bonds yielded about 6.6% at the end of May.
In international fixed income, German Bunds dove deeper into negative interest rate territory. The 10-year German Bund, which yielded 0.81% at one point in February of this year, yielded -0.20% at the close of the month. This is the 10-year Bund’s lowest yield since July 2016. Emerging Markets Debt gained slightly in May, rising 37 basis points. Year-to-date Emerging Markets Debt is up 3.26% and currently yields about 6.5%
The Bloomberg Commodity Index lost 3.36% in May. Oil retreated sharply from its high of $66.30 on April 23, ending the month of May at about $53/barrel. Oil fell nearly 17% in May. Gasoline prices, which surged higher to start the year, saw a bit of a reprieve heading into the summer driving season. Gas prices fell 15% in May; however, gas is still up more than 36% year-to-date. REITs, due to their yield, weathered May’s market environment quite well gained 64 basis points. REITs are up 17.66% year-to-date.
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May 2019 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data as of 5/31/2019. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.