Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
Markets were largely flat for the first half of May as political uncertainty once again dominated headlines with the French presidential election (subsequently won by centrist Macron vs far-right Le Pen) and the unexpected firing of the FBI director in the US overshadowing most other news. Investor complacency has been the theme for most of the year with volatility on an actual and implied basis at the lower end of historical ranges. That said, the trend has been broadly upward sloping with several US indexes hitting record highs. As largely expected, the US Fed left the Fed Funds rate unchanged at their May meeting but signaled that a rate hike was on the table for the June. This was despite the fact that US GDP only grew at a modest 0.7% in Q1. In contrast, growth in Europe continued to strengthen which supported renewed interest among investors to gain exposure to the region. The calm was temporarily interrupted by news that President Trump might have disclosed highly classified intelligence to Russian diplomats in an Oval Office meeting. Markets sold off but quickly recovered as investors digested and eventually disregarded the events. Such was the mood that even a terrorist attack in the UK was met with little significant market reaction.
The Russell 3000 Index finished the month at +1.0%. At the sector level, Technology and Consumer Staples were the leaders for the month while Energy continued its dismal performance. US small cap stocks underperformed large caps with the Russell 2000 Index returning -2.0% on negative performance in seven out of nine sectors. Outside of the US, market performance was slightly stronger as the developed market MSCI World ex USA Index returned +3.3% while the developing market MSCI Emerging Markets Index returned +3.0%.