Most asset classes were positive in May with large-cap U.S. stocks rising 2.3%. In a shift from March and April’s trends, growth stocks outperformed value stocks, though smaller-caps continued to lag larger-caps as they have so far in 2014. The large-cap Vanguard 500 Index is up nearly 5% year to date while the small-cap iShares Russell 2000 index is down nearly 2% through the end of May. Economic indicators also remained mixed. In May, GDP data was revised downward to show that growth
contracted by 1% in the first quarter. However, there is general optimism that the data will improve as the economy bounces back from temporary factors. The Federal Reserve’s mid-month testimony echoed these sentiments, stating its expectation that growth will improve and confirming no change to their current plan for reducing bond purchases while maintaining very low policy rates. At the same time, the Fed observed softening trends in the housing market where, despite some more positive data points in May, overall growth is slower relative to peak levels a year ago. In other news, inflation has shown slight increases in areas such as food, energy, and wages. Overall, though, inflation levels remain mild.
International stocks were positive in May, slightly lagging the United States. Europe continues to contend with slow (or no) growth throughout much of the region and very low inflation overall. As May ended, attention was directed toward the European Central Bank’s early-June meeting and the potential for a rate cut or other policy actions intended to stimulate the economy. Emerging markets have bounced back in 2014 following their dismal showing in 2013 (even as concerns about China’s growth continue). The emerging-markets benchmark rose 3.1% in May and is up nearly 3% so far in 2014.
Treasury yields continued downward in May, hitting 2.48% by month end. The core bond benchmark was up 1%. Municipal bonds were also positive and have risen 4.8% this year. High-yield bonds continued to gain (up 1% for the month and 4.7% for the year) amidst strong investor demand for higher yielding investments and as default risk appears low. Floating-rate loans were more sluggish as interest rate declines have reduced investor appetite for securities that help protect against higher rates. The benchmark was up 0.7% in May and 2.0% year to date.
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