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May 2020 Market Review

William J. Fennie III, CFA

The rebound in equity markets that started on March 24^th continued in May with US Equities rising 4.76%. The rate of daily new COVID-19 infections has fallen significantly from its mid-April peak. The dramatic fall in infections and rise in recoveries is leading many countries to relax lockdowns and reopen their economies. Investors have begun pricing in economic reopenings and a rebound in GDP growth.  Bond markets rallied on the back on spread compression with the Bloomberg Barclays Aggregate Bond Index gaining 0.47%.

Equity

Through the end of May US Stocks have gained more than 36% from their March 23^rd low. This spectacular market performance flies in stark contrast to the horrific economic data. April unemployment rate spiked to 14.7%, the highest in post-war history. Institute of Supply Management PMI surveys, which tracks sentiment among purchasing managers at manufacturing, construction and/or services firms, collapsed to levels not seen since the Global Financial Crisis. A PMI reading above 50 indicate expansion, while below 50 indicates contraction.  The median GDP forecast expects contraction of 5.7% in 2020. However, markets trade on future expectations. The recent performance of equities markets is pricing in the expectation of swift recovery in many of these bad data points.

All 11 of the Global Industry Classification (GIC) sectors were positive in May. Technology and Communication Services led the way gaining 6.49% and 7.49%, respectively. Consumer Staples and Real Estate were the laggards, only gaining 1.68% and 1.91% respectively.

From a Style and Cap perspective, Growth stocks fared better than Value stocks across market cap. Large Cap and Small Cap Growth gained 6.71% and 9.45%, respectively, while Large Cap value gained 3.43% and Small Cap Value gained 12.34%.

The US Dollar gave back some of its year-to-date gains in May against Developed Market currencies. The Dollar Index, which measures the US Dollar against Developed Market currencies, lost about 0.68%. The MSCI EAFE index gained 4.06% in local currency terms but gained more than 4.35% in US Dollar terms. The MSCI Emerging Market Currency Index lost 0.20% versus the US Dollar in May. The MSCI Emerging Markets Index gained 0.63% in local currency. Despite the strengthening of the US Dollar, the conversion to US Dollars caused that gain to become a 0.77% for US investors.

Fixed Income

After ballooning in March, fixed income spread continued to tumble downward in May. The Federal Reserve swiftly enacted several market operations that has helped propel fixed income assets’ recoveries. Bloomberg Investment Grade Corporate Bond Index rallied 1.56% and High yield Corporates returned a strong 4.51% in May.

Treasury prices retracted in May, only losing 25 basis points; however, Treasury Inflation Protected Securities (TIPS) gained 0.30%, as inflation expectations continued to rebound in May.  Ten-year inflation expectations bottomed in March as market participant priced in expected inflation of only 0.55%, although the Federal Reserve continues to target a 2.00% inflation goal. 

German Bunds have had a rollercoaster 5 months. After rising to negative 15.9 basis during January, the German 10 Year Bund’s yield plummeted to negative 86 basis points in the early part of March as contagion fears on the coronavirus sent investors fleeing from risk assets. Then the 10 Year Bund yield rose to negative 19.3 basis points in the middle of March only to fall back toward negative 60 basis points by end April. In May, the 10 Year Bund’s yield rose from negative 58.6 basis points to negative 44.7 basis points as investors look toward the reopening of many European economies.

Real Assets

Overall, Commodities produced strong returns in May. The Bloomberg Commodity Index gained 4.34%. WTI Crude Oil gained nearly 50% as investors priced in increasing demand and a truce to the Russia/Saudi Arabia oil production dispute. Consumers may have noticed their wallets are a little lighter after filling up at the pump. Unleaded Gasoline rose 33.51% in May as summer driving season kicks off. Year-to-date, however, consumers are still receiving a significant reprieve on energy prices as WTI Crude Oil and Unleaded Gasoline are still down significantly. WTI Crude Oil is down 61.94% and while Unleaded Gasoline is down 50.43%.

Real Estate Investment Trusts (REITs) gained about 1.70% in May as lockdowns were relaxed and confidence in tenant’s ability to meet rent and mortgage payments increased. Still there is significant uncertainly for retail concentrated REITs as many suspect consumers’ behavior will be significantly altered by the lockdowns. Year-to-date, REITs are down more than 15%.

Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog at fddbank dot com. We would love to hear from you.

^{May 2020 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, if not otherwise noted, is as of 5/31/2020.  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.}