ECONOMY: U.S. economic data was robust in May signaling above-trend GDP growth for the second quarter. The ISM Manufacturing Index rose to 58.7 with broad-based expansion at the industry level. Inventory levels have not been able to keep up with new orders resulting in a healthy backlog of orders, which should provide a tailwind to growth in subsequent periods. Employment data surpassed expectations as labor market conditions continued to tighten. Nonfarm payrolls increased by 223,000, wage growth improved, and the unemployment rate declined to 3.8%. Outside the U.S., global manufacturing PMI data declined to a 9-month low, but remained indicative of further expansion. Political developments in Italy and Spain prompted renewed concerns about the stability of the Eurozone.
EQUITY: Equities experienced significant performance divergences as a rallying U.S. dollar weighed heavily on international markets. U.S. stocks were positive across all market capitalizations with the S&P 1500 Index returning 2.41% in May. Corporate earning for S&P 500 companies benefited significantly from tax reform with earnings increasing at the fastest pace in 7 years. Smaller cap domestic stocks continued to exhibit market leadership, benefiting from a higher percentage of domestic revenues that are insulated from restrictive trade policies. The stronger U.S. dollar along with political turmoil in Europe contributed to negative returns for international stocks with the MSCI All Country World Index (Excluding the U.S.) returning -2.31%.
FIXED INCOME: Investment grade bonds posted positive returns in May as investors moved to safe-haven assets. The yield on the 10-year Treasury note climbed to 3.12% intermonth before retracing sharply. Treasury yields closed May lower across the curve, boosting fixed income markets. Spreads for higher yielding debt widened as political uncertainty in Europe prompted risk-off sentiment. Despite higher volatility, the Federal Open Market Committee (FOMC) is expected to raise short-term interest rates again in June.