May 2019 Market Commentary – Geopolitics Trumps ‘Geo-Growth’
Benjamin Lavine, CFA, CAIA
Data Source: Bloomberg
May 2019 Highlights:
- Global stocks (MSCI All-Country World Index or ACWI) returned -5.9% led by MSCI Japan and MSCI Europe (-4.0% and -5.5%, respectively) while the U.S. (S&P 500), MSCI Asia-ex-Japan, and MSCI Emerging Markets underperformed (-6.4%, -7.0%, -7.3%, respectively).
- It was a tough month for global markets with U.S. and China/broader Asia bearing the brunt of the trade stand-off. Europe outperformed across broader regions as investors seemed to brush off the results of the European Parliamentary elections as well as prospects for a Hard Brexit following British PM Theresa May’s resignation.
- The S&P 500 dropped 6.4% in May, as investors fled to the safety of rate-sensitive defensive sectors (Real Estate, Utilities, Healthcare, Staples) while Cyclicals and Financials underperformed. The energy sector was hardest hit with spot oil prices dropping to $53.5/barrel from $63.9/barrel at the beginning of the month.
- Small caps underperformed large caps, as is generally expected during risk-off periods, while value underperformed growth, primarily due to the underperformance of financials (lower interest rates hurt margins) and industrial cyclicals.
- Risk-Off behavior was also evident across U.S. thematic, risk-based factors; Quality, High Dividend and Value underperformed while defensive factors such as Minimum Volatility and Momentum benefited from defensive position.
- U.S. fixed income benefited from the flight-to-safety as investors flocked to long maturity U.S. Treasuries which helped the Bloomberg Barclays Aggregate Bond Index return 1.8%. U.S. High Yield underperformed as investors sold off corporate credits alongside equities.
- The 10-Year U.S. Treasury Yield dropped to 2.13% at month-end, levels not seen since 2017. The 2-10 Year Term structure remains marginally positive, but this is due to the significant inversion of the curve at the short-to-intermediate end.
- Interest-Sensitive Real Estate and Precious Metals both benefited from defensive positioning while commodities are being weighed down from the poor performance of oil and industrial metals.
- With the latest breakdown in U.S./China trade relations in early May and the negative rhetoric growing between both sides, investors are adopting a base case scenario that the U.S. will impose 25% tariffs on all of China’s $775 billion imports, representing 1.4% of 2017 U.S. GDP.
- We could be entering into a new global standoff characterized by a Cold War between the U.S. and China over technology advantages and spheres of influence.
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By: Benjamin Lavine