Market returns were generally positive in May, supported by a strong corporate earnings backdrop and a strengthening economic outlook. Mid‐May political tensions were the catalyst for a 46% spike in the CBOE Volatility Index (VIX) that caused a slight correction in the stock market. Strong first quarter earnings reports immediately followed, with three‐quarters of reporting companies exceeding earnings expectations, tempering volatility and improving returns in the waning days of May. Crude oil struggled to remain above $50/barrel despite news that OPEC plans to extend production cuts into March of 2018. The May jobs report revealed a 4.3% unemployment rate, a 16 year low. Nearly 138,000 new jobs were created in May. Although payroll growth was down from recent trends, the labor force contracted sharply, signaling that the labor market may be at or near full employment. Given relatively strong employment data, Federal Reserve officials remain on track to raise interest rates at the upcoming FOMC meeting on June 14. Homebuyers are entering the housing market at a fast pace and continue to put upward pressure on housing prices. The tightening supply of homes continues to put upward pressure on home prices. Retail sales rose 0.4% in April, versus a consensus expectation of a 0.6% increase. Consumer spending at auto dealers, hardware stores and e‐commerce outlets led the moderate gains within the retail environment.
The investing environment continues to be positive for stocks, with good economic indicators being reported for both the consumer side of the economy as well as the industrial and capital‐spending sectors. Generally sound corporate earnings reports and nascent signs that global growth concerns may be abating offered support to both domestic and global markets alike. International equities led the way in May with both developed and emerging markets outperforming their domestic counterparts. Positively, the Eurozone area appears to be gaining economic momentum after years of stagnant growth. Domestically, the NASDAQ was the best performing of index in May, as investors avoided the most economically sensitive sectors of the market and favored companies with established growth profiles.
Bond market returns were strong in May as intermediate and longer‐term rates fell in response to increasing skepticism surrounding the Trump administration’s ability to implement its pro‐growth policy agenda. The 10‐year Treasury yield finished the month slightly lower than April, yielding 2.21%. The Federal Reserve held rates steady at its most recent meeting, while announcing that the board’s plans to proceed with gradual rate increases in the later half of 2017 remain intact. Despite an unemployment rate of 4.3%, inflation and inflation expectations remain well contained. Nevertheless, we caution investors against extending portfolio duration in an attempt to capture additional yield as the economy enters full employment.