US stocks surged in May on solid corporate earnings and economic news. With nearly all S&P 500 firms reporting first quarter earnings, 78% have topped analyst expectations. Overall earnings grew at a 26% rate in the first quarter. After appearing earlier in the month to be making progress in trade talks, the Trump administration announced it was moving forward with tariffs on Chinese goods along with steel and aluminum tariffs on Canadian, Mexican and EU imports. The announcement tempered stock market gains. While April new hires were below expectations, the unemployment rate fell to 3.9%, the lowest level since December 2000. In addition, wages grew 2.6% and inflation edged up 0.1%, both below expectations and eased fears of accelerating inflation. Retail sales were strong in March and April. US stocks climbed 2.82% in May, raising the year to date return to 2.55%.
Foreign stocks fell over the month on geopolitical issues and weak economic news. Japan’s economy shrank a greater than expected 0.6% in the first quarter, marking the first contraction in two years. Growth in the Eurozone slowed over the first quarter to 0.4% from 0.7% in the fourth quarter. In Italy, the President blocked the formation of an anti-euro government which investors worried could send Italy down the path of potentially leaving the currency bloc. However, two Italian political parties were able to strike a deal and form a coalition government. In Spain, the Prime Minster stepped down after a court ruled the PM’s party benefited from an illegal kickback scheme. President Trump canceled his scheduled meeting with North Korea. Oil prices fell 2.2% over the month as Russia and Saudi Arabia were working on a deal to increase oil output. Emerging markets heavily trailed developed markets for the month once again. A strengthening dollar and higher interest rates in the US have weighed on emerging markets. International stocks sank 2.29% in May and are now down 1.77% for the year to date.
Bonds surged in May as investors sought safe havens after geopolitical concerns bubbled up over the second half of the month. The Fed held the Fed Funds rate steady at their May meeting and stated they remain on track to raise the Fed funds rate gradually. Investors expect the Fed to raise the Fed Funds rate a quarter percent at its next meeting in June and are split on whether they will raise the Fed Funds rate two or three more times in 2018. The 10-year Treasury yield ended the month at 2.82%, down from 2.94% to start the month and a mid-month high of 3.11%. For the month, longer-term bonds outpaced shorter-term bonds, with government and muni bonds being the top performing sectors. The broad bond market gained 0.71% in May, bringing the year to date return to -1.50%.
| Index Performance | May | YTD | 1 Yr |
| US Stock (Russell 3000) | 2.82% | 2.55% | 15.06% |
| Foreign Stock (FTSE AW ex US) | -2.29% | -1.77% | 9.94% |
| Total US Bond Mkt. (BarCap Aggregate) | 0.71% | -1.50% | -0.37% |
| Short US Gov. Bonds (BarCap Gov 1-5 Yr) | 0.49% | -0.26% | -0.52% |
| Municipal Bonds (BarCap 1-10yr Muni) | 0.84% | -0.15% | 0.02% |
| Cash (ICE ML 3Month T-Bill) | 0.15% | 0.64% | 1.28% |