MONTHLY MARKET INSIGHTS | MAY 2018

US Markets

Stocks posted modest gains in April as solid earnings faced headwinds from higher interest rates, inflation fears, and geopolitical concerns.

For the month, the Dow Jones Industrial Average rose 0.25 percent while the Standard & Poor’s 500 Index rose 0.27 percent. The NASDAQ Composite lagged, posting a gain of less than 0.1 percent. 1

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Stocks opened the month on a lower note, as prices seesawed between trade tariff threats coming from the U.S. and China, and signals that negotiators might manage to avoid a trade war. The Bureau of Labor Statistics employment number was disappointing, too, but was largely overlooked amid trade concerns.

Geopolitical Tensions Ease

Following airstrikes by the U.S., the U.K., and France in response to Syria's alleged use of chemical weapons, investors were relieved when tensions in the region did not escalate further.

Earnings Top Estimates

As earnings season moved into full swing, investors turned their focus toward market fundamentals, pushing geopolitical worries out of the spotlight. With expectations running high, first-quarter earnings largely came in above expectations.

As of April 27, with 53 percent of the companies in the S&P 500 Index reporting, 79 percent posted first-quarter earnings that were above estimates. If this rate holds, it will be the highest percentage of companies exceeding estimates since FactSet Research began tracking this measure in 2008.2

Eye on Macro Trends

Rather than seeing a decisive strengthening in prices from these positive surprises, markets vacillated on doubts that the pace of growth could be sustained. These concerns surfaced as the 10-year Treasury yield touched three percent -- a rate that prompts talk about inflation.

Despite a couple of big merger deal announcements, stock prices closed out the month lower, nearly sending stocks into negative territory.

Sector Scorecard

Positive monthly returns were experienced by most industry sectors in the S&P 500 Index, led by Energy, which rose 9.64 percent. Other gainers included Consumer Discretionary (+2.96 percent), Financials (+2.03 percent), Health Care (+3.96 percent), Materials (+2.07 percent), Real Estate (+1.57 percent), Technology (+2.03 percent), and Utilities (+2.84 percent). Sectors losing ground were Consumer Staples (-1.53 percent), and Industrials (-0.38 percent).3

U.S. Market Recap for April 2018
S&P 500 0.27% Month ‌ -0.96% Year-to-Date	NASDAQ 0.04% Month ‌ 2.36% Year-to-Date	Russell 1000 0.48% Month ‌ -0.67% Year-to-Date	10-Year Treasury 2.94% Month ‌ 0.54% Year-to-Date
Yahoo Finance, April 30, 2018. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.

What Investors May Be Talking About in May

It has become something of a springtime ritual to discuss the market aphorism, “Sell in May and go away.“ It receives this sort of attention each year for a good reason: some research has indicated much of the historical returns in the stock market have been generated in the November-to-April period.4

But dissenting voices also surface, arguing why it may not turn out to be true this year. Newer research indicates that this performance phenomenon is almost entirely attributable to market activity in the third year of a presidential term. Stripping out this single year reduces the seasonal difference to nearly zero.5

Spike in Volatility

More meaningful for investors is the market’s elevated level of volatility this year, and what it means for them.

In 2017, there were just eight days where the daily change in prices was one percent or higher. By April 6th, a one percent daily move had already occurred 23 times.6,7 The question for investors is whether this heightened volatility is an indication of a market top or a market bottom.

World Markets

Global markets weathered the geopolitical turbulence last month, as the MSCI-EAFE Index advanced 1.85 percent.8

Europe was a mixed picture, though the major markets moved solidly higher, with solid gains in France, Germany, and the U.K.. 9

Stocks in Pacific Rim markets also performed well with gains in Australia, Hong Kong and Japan.10

World Market Recap for April 2018
Emerging Markets	March	Year-to-Date
Hang Seng (China)	2.4%	3.0%
Kospi (Korea)	2.8%	1.9%
Nikkei (Japan)	4.7%	-1.3%
Sensex (India)	6.6%	3.2%
Jakarta Composite (Indonesia)	-3.1%	-5.7%
Bovespa (Brazil)	0.9%	12.7%
IPC All-Share (Mexico)	4.8%	-2.0%
Merval (Argentina)	-3.6%	0.1%
ASX 200 (Australia)	3.9%	-1.4%
Europe
DAX (Germany)	4.3%	-4.4%
CAC 40 (France)	6.8%	3.9%
Dow Jones Russia Index (Russia)	-7.6%	0.0%
FTSE 100 (Great Britain)	6.1%	-2.3%
Yahoo Finance, April 30, 2018. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

Indicators

Gross Domestic Product

Continuing a pattern in recent years of weaker first-quarter economic growth, the GDP expanded by 2.3 percent, dragged down by weaker consumer spending.11

Employment

The unemployment rate remained at 4.1 percent as employers added just 103,000 new jobs in March. While the deceleration in hiring came as a surprise to most economists, it nevertheless represented the 90th consecutive months of job growth. Wage growth continued to remain modest, rising 2.7 percent from a year earlier.12

Retail Sales

Retail sales jumped 0.6 percent in March, bouncing back after three straight months of weak growth. Though the rise represented a welcomed rebound, excluding vehicle sales the rise was just 0.2 percent, indicating that an underlying weakness remained. 13

Industrial Production

Industrial output rose 0.5 percent, while capacity utilization, a measure of slack in the industrial sector, jumped 0.3 percentage points to 78 percent, its highest reading in three years.14

Housing

Housing starts rose 1.9 percent, primarily driven by an acceleration in the construction of new multifamily units. Starts on single-family homes declined by 3.7 percent.15

New home sales jumped by 4.0 percent, led by a 28.3 percent surge in the West region.16

Existing home sales increased 1.1 percent versus the prior month, but were down 1.2 percent from March of last year, suggesting that low inventory (which has caused prices to rise) and higher mortgage rates are weighing on the market.17

Consumer Price Index

The CPI dropped 0.1 percent due to a decline in gasoline prices. However, excluding the more volatile energy and food sectors, core inflation rose by 0.2 percent. For the last 12 months, consumer prices have risen 2.4 percent, which is the fastest annual pace in the last year.18

Durable Goods Orders

Orders for long-lasting goods increased by 2.6 percent, boosted by a 44.5 percent bump in aircraft and parts orders. It is the fourth monthly increase in the last five months.19

The Fed

Minutes from last month’s Fed meeting showed a unanimous opinion on the part of Fed officials that the economy would likely grow faster than they had earlier anticipated and that inflation would continue to accelerate.

With growing confidence that inflation would hit their two-percent target, Fed officials also restated their intentions to maintain their strategy of gradual rate increases. The possibility of a trade war was cited as a potential risk to the Fed’s otherwise very positive outlook for the U.S. economy.

By the Numbers