A tale of two markets: A surge in the U.S. while international stocks retreat.
A strong jobs market and lower-than-expected inflation may have been key drivers behind May’s surge in U.S. stocks. Volatility settled down, too. Stocks overseas dropped thanks to such international events as uncertainty about the future Italian government and tariffs levied on European, Canadian, and Mexican imports into the U.S.
May saw U.S. stocks return to strong performance while international stocks fell back. Although large-cap U.S. stocks rose +2.41% for the month, small caps were the real stars. They were up +6.46% (S&P 500 and 600 indices). These rises accompanied a decline in the volatility we’ve seen recently. The S&P 500 moved up or down by more than 1% on only two days in May.
It wasn’t such a pretty picture overseas, however. Developed-market stocks (MSCI EAFE Index) were down 2.25%. Emerging markets took an even bigger hit, ending May down 3.54% (MSCI Emerging Markets Index).
Bonds had a good month, with the Bloomberg Barclays Aggregate Index up +0.71%. The U.S. dollar was up about +2.3% for the month.
Why it happened.
As we’ve said before, it’s hard to pinpoint the causes for short-term market moves. Solid news about the jobs market (continued growth but with low wage growth) and lower-than-expected inflation may have helped drive U.S. stocks up. These two factors point to continued good economic performance. But, importantly, the news of wage growth and inflation coming in lower than expected may have reduced the pressure on the Federal Reserve (the Fed) to increase interest rates, which would aim to curb inflation. We see this in longer-term interest rates, which reflect expectations of things like future interest rates and inflation.
Something else helping drive interest rates down may have been global political uncertainty (more on that below), which led investors to seek safety in U.S. bonds, pushing their prices up. Ten-year rates (the interest rate the government pays to borrow over 10 years) went as high as 3.11% in May. Rates then fell sharply over two weeks, to 2.83%. Lower interest rates can help boost stocks, as companies can borrow money more cheaply.
Major international events weighed on overseas stocks this month, with ripple effects felt in U.S. markets. First, we saw a jump in uncertainty about what the next Italian government would look like. Italy is one of the largest economies in the European Union (EU). The possible formation of a populist coalition in Italy with some members hostile to the EU hit European stocks mid-May, and again late in the month. Second, at the end of the month, the U.S. administration imposed tariffs on imports from the EU, Mexico, and Canada, again hitting stocks. Finally, the volatility in oil prices may have hurt emerging-market stocks.
The effects overseas were amplified by the rise in the dollar. A stronger dollar reduces the prices of international stocks for U.S. investors. For more on this, plus how international stocks can help diversify a portfolio, take a look at this month’s sidebar.
What it means for you.
A personalized Financial Engines portfolio tends to be weighted slightly more to domestic stocks than to international. This, along with our allocation to bonds, means your portfolio will likely have been up a fraction over the month.
Portfolio performance will vary month to month with the ups and downs of markets. But you’re more likely to have long-term success if you’re invested in a portfolio that’s built just for you. The more you tell us about yourself, the better we can personalize your portfolio to your situation. How do you feel about investment risk? Do you have other accounts like IRAs? When do you hope to retire? Log in to your Financial Engines account or call one of our advisors to tell us more, and we’ll build a portfolio that’s best for your unique goals and personal situation.