June 09, 2020

Monthly Market Summary – May 2020

Risky assets continued to recover during May with prices for global equities, corporate bonds, and commodities moving higher during the month.  Returns for safe haven assets, such as U.S. Treasury bonds lagged.  Financial market participants appeared to look beyond the sharp economic toll in the first half of 2020 from the response to the COVID-19 pandemic and looked toward a recovery.  Markets focused on the recovery as the reopening of businesses and lifting of certain social restrictions accelerated around the world.  Pick-ups have been seen in data such as air travel, oil demand, auto sales, and manufacturing activity.  The reopenings occurred despite a spike in cases in Latin America, particularly Brazil, and new clusters of cases in northeast China that caused the Chinese government to order a new lockdown in that region.  Positive news about testing of a potential vaccine also provided a boost to recovery sentiment.

Additional government and central bank stimulus actions supported the outlook for recovery.  Japan passed a $1 trillion stimulus bill, the European Union proposed a €750 billion recovery package that includes grants and loans, and China launched a new stimulus package.  Brazil, Mexico, India, and Norway are examples of countries that cut policy interest rates in May.  In the U.S., Federal Reserve (Fed) chair Powell said that the Fed has not run out of ammunition yet and will do what is necessary to support the economy.

The major U.S. equity market indices continued to rebound in May.  The S&P 500 index gained 36% since the sell-off low on March 23 through May 31.  However, the index was still down 10% from the February 19 closing high.  Each of the U.S. equity indices we track posted a positive return for the month.  For the second consecutive month, mid-capitalization (cap) stocks were the performance leaders outperforming small-cap stocks that outperformed the large-cap stocks.  Growth stocks again outperformed value stocks by a wide margin in each market cap category.  Notice that the S&P 500 Growth and Russell MidCap® Growth indices have a positive year-to-date return.  For the second month in a row, returns were positive for each of the 11 industry sectors in May.  The top performing sectors were information technology, materials, consumer discretionary, and healthcare.  The defensive utilities and consumer staples sectors along with the more cyclical energy and financials sectors posted the lowest returns.

The U.S. equity indices outperformed both the MSCI EAFE index of developed international country equities and the MSCI Emerging Markets index (EM).  The EAFE index outperformed the EM index.  U.S. dollar based returns for both the EAFE and EM indices were higher than the local currency returns since various currencies appreciated against the dollar.  Just as in the U.S., growth stocks outperformed value stocks in both the EAFE and EM indices.  Sector returns varied.  In developed international markets, industrials, materials, and real estate stocks had the best returns while in emerging markets energy, healthcare, and consumer discretionary had the best returns.  In both the EAFE and EM indices, financials, communication services, and information technology had the lowest returns.  On a geographical basis, among developed international countries, European countries, except the United Kingdom, outperformed Canada and the Pacific region.  Russia, Poland, and Brazil had the best returns among emerging markets countries while China, Taiwan, and India lagged by posting negative returns.

U.S. bond market sector returns were mostly positive in May.  Long time to maturity Treasury bonds were the only major sectors to post a negative return.  For the second consecutive month, the benchmark 10-year Treasury bond yield moved in a tight range during the month.  The 10-year Treasury bond yield was 0.66% at the end of May compared to 0.64% at the end of April.  The 30-year Treasury bond yield moved a bit more ending May at 1.41%, which was up from 1.28% at the end of April.  Corporate and municipal bonds had the best returns in the fixed income markets since prices rebounded on strong demand.

The Bloomberg Commodity index posted a positive return in May.  Returns were positive for each of the sub-indices we track except for the grains index.  The petroleum sub-index had the best return with a gain of almost 35% as crude oil prices rebounded due to improving demand for oil and sharp production cuts.  The price of West Texas Intermediate crude ended May at $32.32 per barrel, which was up from the April close of $19.83.  Silver also had a double-digit gain of almost 15% reflecting an uptick in demand for industrial purposes.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

The reopening of economies and the resulting pick-up in business activity is encouraging, but there is a long way to go to return to pre-pandemic levels in key areas such as unemployment.  The path of recovery is likely to be uneven and vary by sector and geographic region.  As the pandemic impact recedes, other issues are resurfacing.  Chief among these is the flare-up in U.S./China tensions that occurred during May.  Therefore, we expect volatility to remain high.

We continue to recommend keeping at least a year of cash on hand to be in a position to ride out market volatility.  We have a neutral view on growth relative to value preferring to have exposure to sectors where previous growth trends are largely intact or are likely to accelerate because of the pandemic impacts along with some exposure to cyclicality to participate when the economy improves.  With bonds looking expensive with yields at historic lows, we favor equities over bonds.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging markets equities.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.  We recommend looking at opportunities to do tax loss harvesting and portfolio rebalancing.

The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions.  These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.