Positive economic readings are supporting respectable U.S. equity performance, while heightened geopolitical concerns continue to be the driving force of increased market volatility. First quarter real GDP growth came in at a satisfactory 2.2%, while fourth quarter GDP growth was revised up to 2.9%. Consumer confidence increased in May, rising to 128.0 and remains at historically strong levels. In addition, U.S. personal income rose 0.3% in April, exceeding expectations. Markets will likely need to digest rising inflation expectations in the months ahead as the U.S. labor market approaches “full” employment. The U.S. added 223,000 non-farm payroll jobs in May and the unemployment rate edged down to 3.8%. The manufacturing side of the economy continues to perform well. The Institute for Supply Management’s Purchasing Managers Index registered at 58.7 in May - any reading above 50 reflects expansionary economic conditions. Oil prices fell over the waning days of May, potentially signaling a more balanced supply/demand backdrop after rising for much of 2018. Tariff negotiations with China and fiscal and political tensions in the European Union will likely drive market volatility over the next several quarters. As evidence, the Trump Administration’s “America First” agenda continues to be reflected in its trade policy, which imposed controversial aluminum and steel tariffs on U.S. allies, Canada, Mexico, and the European Union on the final day of May.
U.S. equities rebounded in May, with all three major U.S. indices posting positive returns after a somewhat meager performance in April. Investor attraction to “growth” stocks continues to be apparent, as the technology-heavy NASDAQ Index remained the leader of the major U.S. indices, returning 8.31% year-to-date. The small-cap Russell 2000 Index posted a strong May return as investors favored companies less exposed to geopolitical activity, no doubt influenced by the political and fiscal unrest in Italy and Spain. Losses were most notable in international markets as fears again resurfaced of a potential European Union break up. Global developed (MSCI EAFE) and emerging markets (MSCI EM) posted losses of -2.11% and -3.52%, respectively for the month.
Longer-term interest rates moved down during the month, resulting in positive returns across most of the bond market. The yield on the 10-year Treasury closed the month at 2.91%, after posting its largest one-day drop since June 2016 in the waning days of May. Investment-grade and high-yield corporate bonds underperformed their government counterparts as credit spreads widened over the month from remarkably tight levels. The Federal Reserve left rates unchanged at its May meeting, but communicated its commitment to systematically raise interest rates as long as current economic conditions remain intact. Consensus among economists and analysts call for at least two more rate hikes from the Fed in 2018.