U.S. Stock Market Drops -6.39%
In the month of May, international developed stock markets fell 4.73%. The U.S. and the UK lagged other developed regions, recording losses of -6.39% and -6.00%, respectively. The Pacific region and Canada held up well amidst all the volatility. Year to date returns have overturned much of 2018’s losses, reminding investors that timing the market is difficult and staying invested is the key.
Emerging Markets Mixed in May
Broader emerging markets posted a loss of 6.24% for the month. Much of the losses were from the Chinese and Korean markets. They recorded losses of -13.09% and -9.30%, respectively. However, Russia, Brazil, and India all took a step forward in May, highlighting the importance of diversification across regions and countries. Emerging markets are still trading at attractive valuations relative to the U.S.
Utilities and Infrastructure Hold Up Well in Volatile Month
Utilities and infrastructure recorded minimal losses of 0.91% and 1.33%, respectively. Information technology and energy dropped in May, posting returns of -8.49% and -8.25%, respectively. Year to date returns are strong across most defensive sectors.
Value Underperforms Growth
In May, value underperformed growth in the large-cap and small-cap space. Momentum recorded a loss of 4.62%. Historically, different equity factors have their own periods of outperformance, usually in shorter time periods but sometimes lasting a decade. However, tilting portfolios to capture more of the value and size premium has historically compensated investors in the long run.
Momentum Off to Strong Start
In the international developed markets, value underperformed growth in the large-cap space and in the small-cap space. Momentum recorded a loss of 2.01% while small-cap emerging market stocks posted a loss of 5.12%. Over a ten-year period, value has kept pace with growth while the size premium was positive in the international developed markets.
With the Yield Curve Flat, Cash is an Attractive Investment Option
With the U.S. equity market trading at a high valuation and fixed income spreads low, investors can turn to cash and earn a competitive rate of return. Investors can earn a similar annual rate on cash versus those of intermediate-term bonds. The CPI increased by 2.20% year over year through April.
High Yield Takes a Step Back
The returns of deflationary hedges were primarily positive for the month. Long duration bonds outperformed with long-term government and municipal bonds returning 6.46% and 1.80%, respectively. The Barclays U.S. Agg Bond Index was up 1.78%. Emerging market bonds are up 7.33% year to date. Emerging market debt may warrant a higher portfolio allocation if developed market growth continues to slow and their high debt levels become burdensome.
Price of Crude Oil and Natural Gas Volatile in May
Inflation-sensitive investment returns were mixed for the month. Crude oil and natural gas recorded losses of 16.21% and 6.04%, respectively. Inflation-indexed bonds and gold posted modest gains. Gold has recorded flat to modest returns during this bull market, but currently has favorable supply/demand dynamics and provides a valuable hedge against numerous late cycle risks.
U.S. Dollar Strengthens over the Past Quarter
Over the past three months, the U.S. dollar appreciated against the British Pound, Chinese Yuan, and most other major currencies. Relative to the U.S. dollar, the British pound and Chinese yuan depreciated by 5.08% and 2.97%, respectively. For equity investors, earnings growth and dividends are far more significant to an investor’s return over the long run than the returns from relative currency movement.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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