Market Update - May 22, 2017Submitted by Jodi Vleck , Beta Wealth Group on May 22nd, 2017
For the week ended May 22, U.S. stocks ended slightly lower, including one of the sharpest daily declines of 2% on Wednesday, as the specter of rumors surrounding President Trump’s potential intervention in FBI investigations over Russia raised questions about impropriety, overshadowing strong earnings reports from the likes of Wal-Mart, McKesson and Deere. Notably, this soured sentiment surrounding the current administration's ability to implement much-awaited legislation, especially tax and healthcare reform. From a sector standpoint, defensive sectors such as utilities outperformed, while consumer sectors such as cyclicals and technology lagged meaningfully. From a macro-economic lens, mixed regional manufacturing reports and a drop in housing starts were partly offset by low jobless claims numbers and stronger industrial production numbers.
Notably, the VIX, which had been hovering around its lowest levels in 20 years shot back up briefly before settling back at around 12 to close the week. While the VIX has been historically been a gauge of investor fear or complacency at extremes, periods of complacency have often run longer than anticipated, leading to less-than-perfect correlations with movements in equities.
Foreign stocks in Japan and Europe ended the week with negative local currency returns, but outperformed domestic equities when adjusted for the decline in the US dollar vs. local currencies. Emerging markets lagged, as Brazilian markets lagged by over 8% with the new president caught up in a potential bribery/corruption scandal, similar to those of his predecessors. On the positive front, fiscal and structural reforms in Brazil and several other key emerging market nations seem to have taken hold which bodes well for future growth and stability. Longer-term however, growth prospects in emerging markets continue to offer higher return potential than in developed markets, driven by stronger demographics and increasing consumer demand.
U.S. bonds gained ground, due in part to equities outflows with investment-grade credit outperforming government bonds, while high yield credit lagged slightly. Developed market sovereigns gained sharply, while emerging market bonds ended the week about flat despite spread spread widening in Brazil.
Lastly, real estate markets experienced gains during the week contrary to broader equity markets, with U.S. markets outperforming international REITs, perhaps due to the tailwind of lower interest rates. Commodities gained with crude oil rising 6% upon anticipation of the OPEC extending supply cuts during their meeting slated for late May.