The markets experienced heightened volatility in May, with virtually all U.S. and international equity indices declining – including the S&P 500, which dropped 6.4% for the month. The decline in global markets was largely attributable to broad-based de-risking as the trade war between the U.S. and China heated up in May. If you recall, as recently as late April, media reports had suggested that the trade talks were constructive, instilling a sense of complacency in the markets that faltered throughout May as tensions escalated.
Another contributor to the market decline is that investors are now bracing for a slowdown in global growth, perhaps somewhat interrelated with the ongoing trade war. The Fed’s recent commentary provides some affirmation of these concerns, and investors are now expecting the Fed to cut rates this year. These expectations drove interest rates down for the month, resulting in positive returns across virtually all fixed income indices.
Parts of the yield curve inverted again in May, including the closely watched gap between the three-month and 10-year rates. Again, if you recall from our discussion in March, an inversion of the yield curve has historically been a leading indicator of a recession. That said, U.S. macroeconomic data has remained constructive; such data points include the Consumer Confidence Index, which climbed to 134.1 in May from 129.2 in April, and the ISM manufacturing index, which declined slightly to 52.1 in May from 52.8 in April, but remains expansionary.
On the geopolitical front, we believe the trade war is the most significant risk and continue to monitor developments.
The monthly Market Overview is written by two members of MACRO’s Investment Committee: Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.