Overview
-Clouds started to gather over the global economic recovery in May as growth slowed throughout the world. Investors’ confidence in the continued economic recovery waned and as a result investors moved out of stocks and into safer assets. Stocks were down for the month in the U.S. and abroad while safe havens like the dollar and U.S. bonds rose. In addition to slowing growth, the condition of the U.S. housing market continued to decline. On the bright side, corporations have been able to maintain their growth with first quarter profits up over 8% and merger and acquisition activity off to a fast start this year. However, economists are becoming increasingly pessimistic about second quarter growth, lowering their forecasts based on slower manufacturing levels, the feeble housing market, and reduced consumer spending.
Economic News
-The U.S. private sector created 244,000 net jobs in April to offset cuts in government positions with hiring reaching its fastest pace in 5 years. The number of job openings rose once again and initial jobless claims fell, however with the unemployment rate at 9.0% much larger job growth is needed to support the a recovery. The Fed forecasts unemployment to drop slightly to 8.4% to 8.7% by year’s end but be down to 6.8% to 7.2% by late 2013.
-Home prices’ precipitous declines have continued in 2011 as home prices have reached 2002 levels with some metro areas below their 2000 levels effectively eliminating over 8 years of home equity across the country. Home prices fell 4.2% in the first quarter after falling in the 4th quarter as well. The falling prices often lead consumers to remain in homes as they can’t sell and it lowers spending. The weak climate has led the National Association of Realtors to reduce their estimate for home sales for the year.
-Economic readings have begun to slow throughout the world in reports released in May. In the U.S., manufacturing, business and consumer spending, and an index of leading economic indicators fell or their growth slowed. Consumer confidence fell as well, with consumers more concerned about the future of the economy and job market. Internationally, growth has begun to decelerate in Asian emerging market nations, Europe’s factories have slowed the pace of production, and the fallout from the disasters in Japan was even worse than expected with the economy contracting at a 3.7% annual rate.
-The Euro-zone’s economy grew in the first quarter, however the disparity between the strong northern countries and the debt saddled peripheral countries is growing. Greece’s budgetary problems continue with its deficit likely only to decline slightly this year and not all in 2012, thus the austerity measures that have been taken will likely not be sufficient. Greece requested a restructuring plan for its debt, but was denied by the European Central Bank. The ECB put pressure on Greece to sell assets and cut spending and Greece agreed to sell $70.7 B in government owned assets in order to pay creditors. However, the potential of Greece picking itself up and dusting itself off without additional loans or some form of restructuring is looking increasingly bleak.
Corporate News
-U.S. Corporate profits grew 8.5% from a year early or to $1.7 trillion annually in the first quarter. Chrysler, GM, Kohl’s, Nordstrom’s, and Dell were among the firms reporting strong earnings in May.
-To date M&A activity is up 41% over last year with 30 transactions of more than $5 B. Businesses are feeling more confident that they can take investment risks combined with large cash positions on company balance sheets and low nominal interest rates to make the corporate landscape fertile for deals. The most high profile transaction in May was the announcement by Microsoft of their purchase of internet phone company Skype for $8.5B as they look for new avenues of growth.
-Firm’s are trying to quickly issue debt before the Fed ends it bond buying program on fears that rates will rise after it is completed. With interest rates historically low, Johnson and Johnson issued its largest bond deal ever, Texas Instruments raised debt for the first time in more than ten years, and Google had its first bond deal ever early in the month.
-Linkedin’s IPO debuted strongly and more than doubled in its first day of trading as investors tried to get their hands on the latest tech wave. The professional networking site is now valued at $9 B after the biggest internet IPO since Google. The firm will be leading a wave of wed based companies expected to go public in the coming months. It is expected to be a lucrative year for Wall Street for IPOs as fees are expected to be over $2.5 B. It would be the second highest amount in more than 10 years.
-The fallout continues for Japanese firms as a result of the earthquake and tsunami. Sony announced that it will likely face a $3.2 B first quarter loss due to the disruptions associated with the disasters. Toyota’s run as the leading auto maker in the world ended as they slipped to third with the company suffering from an appreciating yen and the March catastrophes that brought plants to a halt.
-In news from two embattled firms from the financial crisis, Chrysler announced it will repay $7.5 B in bailout funds, and AIG began its exit from government control. The insurance giant sold $8.7 B in stock, which reached a small profit for taxpayers.
Regulatory News
-Hedge Fund behemoth, Raj Rajaratnam, founder of Galleon Group, was found guilty on all 14 counts of securities fraud and conspiracy in the biggest insider trading case ever. It was a major victory for the SEC as they try to cut down on the practice in a notoriously hard to prove area. With several ongoing cases, the verdict could provide significant momentum for the SEC.
-The head of the IMF, Dominique Strauss-Kahn, was arrested on sexual assault charges while in New York. Mr. Strauss-Kahn, a French presidential candidate, was forced to resign from his post as head of the IMF.
Market News
-May ended on an upswing for stocks, but for the month stocks were down for the first time since August. Much of the decline was led by increasing concerns over the health of the economic recovery and by continued Greek debt concerns as investors were not as confident about the future. Global economic readings began to show slowing growth over the month and with each additional report investors lost some of the confidence they had in the market. The Dow and S&P 500 fell -1.53% and -1.13%, respectively. May saw almost a dead heat between growth and value with value performing slightly better, and large cap outperformed small cap for the second consecutive month. On the international side, renewed concerns over Greece weighed on markets along with signs of weakening economic growth in developed and emerging nations. Emerging markets were down -2.62%, outperforming developed markets by 0.33%.
-Commodities had their worst month of the year easing of highs as signs of a possible global economic slowdown reduced demand for raw materials. Oil prices plummeted 10%, falling below $100 a barrel, before finishing at $103. Drivers will begin to see relief at the pump as the summer vacation season gets underway. Precious metals fell as well with gold down 1.3% and silver off 21%.
-Bonds had a strong month in May as investors sought a safe haven on mounting economic worries. All terms and sectors were up for the month improving on April’s returns. Despite the U.S. hitting its debt ceiling mid month and continued questions about how the market will perform after the quantitative easing program ends in June U.S. Government and Treasury intermediate long term debt were the best performers up 1.3% to 3.0%. In general, longer term debt outperformed short term debt over the month. Agencies once again had the weakest performance. The 10 year treasury yield fell over the month ending the month at 3.05%, its lowest level since early December.
Index Performance May YTD
US Large Cap Stock (S&P 500) -1.13% +7.82%
International Stock (FTSE AW ex US) -2.81% +5.65%
US Broad Bonds (BarCap Aggregate) +1.31% +3.02%
US Government Bond (Barclay’s Govt) +1.42% +2.44%
Cash (ML 3Month T-Bill) +0.01% +0.08%
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