Research & Insights

May 2016

May 2016

Kai W. Hong, CFA
Managing Director & Chief Investment Strategist

In a period of limited major macro news, investors fixated mostly on the likelihood of a Fed rate increase in the coming months. Economic data was generally weak as Japan and China both struggled to reposition towards organic growth, Europe (while improving) still faced structural impediments to action, and the US grappled with the limits of monetary stimulus. US employment, which had been a strong datapoint for a while, came in surprisingly weak, most likely delaying the next Fed rate increase. While market valuations in emerging markets were more reasonable, they had a number of structural problems of their own with the headline event of Brazilian President Rousseff’s impeachment a reminder of the incremental risks in those markets. Hanging over all of this was the shift in the outlook for “Brexit” from unlikely to too-close-to-call. Corporate M&A continued to be robust but further served to highlight how little organic growth there was available to be had. That said, strengthening oil prices in the latter half of the month helped pace a modest market rally.

Initial declines in the markets were reversed mid-month, and the Russell 3000 Index finished at +1.8%. Sector spreads were significantly tighter than the prior month. Technology was the standout with all other sectors falling in a range of -2% to +2%. Once again, US small cap stocks did a little better as the Russell 2000 Index returned +2.3%. Outside of the US, market performance was softer, partially impacted by a 3% rally in the USD. The developed market MSCI World ex USA Index returned -1.1% while the developing market MSCI Emerging Markets Index returned -3.7%.