There were a lot of changes in the global markets in May, and many of them caught investors by surprise.
U.S. stocks made another sharp turn. To review the year, they had an extremely strong January. Then, they were weak the next few months as investors adjusted to higher interest rates, trade conflicts and other changes.
In May, after a negative start, U.S. stocks brushed off these other problems and delivered strong returns. Even more interesting, there was a change in market leadership.
The S&P 500 returned 2.43% for the month, but it lagged other key indexes. Smaller company stocks, as measured by the Russell 2000, returned 6.16%. That was the best month for small company stocks since November 2016. Small company growth stocks did even better, returning 7.17%.
Technology companies also continued their strength. The Nasdaq 100, which has a lot of large, established tech companies, returned 5.67% for the month.
But the strength in U.S. stocks wasn’t across the board. Negative sectors for the month were consumer staples (-1.57%), financials (-0.98%), telecommunications (-1.53%) and utilities (-1.11%).
Industrials bounced back with a 3.07% return for the month, but they still have a negative return for the year to date. Energy, of course, is doing well with the rise in oil prices. Energy stocks rose 2.99% for May and are up 12.77% for the quarter so far.
But the strong returns were focused almost entirely in U.S. stocks. International stocks didn’t do well during May. Headwinds for international stocks included higher U.S. interest rates, a rally in the dollar, slower growth outside the United States (especially in Europe) and political problems in many countries.
The biggest declines were in Brazil (-15.79%), Mexico (-13.41%), Italy (-9.77%) and Spain (-8.27%). But the losses were widespread. Developed markets overall, as measured by the EAFE Index, declined 1.89%, and emerging markets overall lost 2.62%.
Perhaps more importantly, when we look at moving averages, trading ranges and other technical tools, there’s a big difference between the U.S. and other markets.
Most of the technical measures of the U.S. markets are positive. U.S. stocks have strong upward momentum and show few signs of potential weakening. The technical analysis delivers negative assessments of most international markets. The best that can be said about most of them is that they are oversold. But, except for the last few days, there aren’t signs of the downward trends stabilizing or reversing. Latin American markets are especially negative by most measures.
U.S. markets trailed the global markets for much of 2016, all of 2017 and beginning of 2018. There has been a strong reversal in the last month or so. We’ve had a few rallies in U.S. stocks since the peak in January. But each rally ran out of steam after a week or two. So far, this rally has been stronger than the previous ones in 2018. We’ll have to wait a little longer to see if U.S. stocks are ready to begin a new run for record highs or if this is another false start. So far, the early signs are promising.
Manufacturing continues to show strength in the surveys and anecdotal reports. The PMI Manufacturing Index declined slightly to 56.4 from 56.5. That’s still a strongly positive reading, and several components of the survey were very strong.
The ISM Manufacturing Index, which has been stronger than the PMI for some time, rose to 58.7 from 57.3. Key components of the survey, such as new orders and backlogs, were even stronger than the headline number. This indicates growth is accelerating in manufacturing, though growth still hasn’t been as strong in the actual economic data as in the surveys.
Factory Orders were mixed. The headline number was a 0.8% decline following a 1.7% increase last month. But volatile aircraft orders influenced the headline number. Core capital goods, which are a good measure of business investment, increased 1.0%. This is a strong number.
The service sector of the economy continues to do well. The PMI Services Index increased to 56.8 from 54.6. The ISM Non-Manufacturing Index also increased to 58.6 from 56.8.
There weren’t many surprises in last week’s Employment Situation reports. The number of new jobs was a bit higher than expected at 223,000. But the previous month was revised down to 159,000 from 164,000. The unemployment rate fell to a new low for this expansion at 3.8%. Average hourly earnings rose 0.3% for a 12-month increase of 2.7%. Those aren’t big numbers for wage increases historically, but they are strong for this recovery. They show that the strong labor market finally is generating some inflation pressure.
Productivity remains weak. The second estimate of first quarter productivity growth was downgraded to 0.4% from 0.7%. Also, unit labor costs increased 2.9%, up from 2.7% in the first estimate.
New unemployment claims decreased 1,000 for a total of 222,000. Of course, this remains near historic lows, and the four-week average of continuing claims is the lowest since December 1973.
The S&P 500 gained 1.76% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.95%. The Russell 2000 returned 1.74%. The All-Country World Index increased 1.91%. Emerging market equities soared 3.13%.
Long-term treasuries lost 1.98% for the week. Investment-grade bonds fell 0.76%. Treasury Inflation-Protected Securities (TIPS) dropped 0.28%. High-yield bonds returned 0.71%.
On the currency front, the dollar fell 0.40%.
Energy-based commodities declined 2.47% for the week. Broader-based commodities fell 1.06%. Gold lost 0.40%.
Bob’s News & Updates
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