Market Wrap…So much for those naysayers predicting “doom and gloom” and pointing to the past few (weak) second quarters as proof. In May, the Dow Jones enjoyed its sixth consecutive winning month, while the S&P 500 claimed its seventh. The Blue Chips crossed the 15,000 mark into record territory and the S&P pushed to higher highs as fence-sitters feared they would miss out on all the fun. For the year, the small-cap Russell 2000 has led the way for the major domestic indexes. By month-end, however, Fed watchers began to predict that the $85 billion per month bond buying program was nearing the “beginning of the end” and the policymakers may soon taper (reduce) the purchases. While the Fed certainly hopes that the economy will be strong enough to maintain growth on its own, some investors worry that the long-standing stimulus remains critical to keeping things (and market performance) on a favorable course. The major indexes lost ground in the final two trading weeks, though the monthly winning streaks remain intact.
On the Political (and Corporate) Fronts…The finger-pointing continued in DC as scandals galore (Benghazi talking points, IRS treatment of conservative groups, Associated Press’ phone records) gave politicos plenty to focus on (which, of course, meant no headway on budget talks). Higher payroll taxes and “bailout” paybacks from Fannie Mae and Freddie Mac put a nice dent in the deficit and allowed Congress to continue “kicking the can” down the road. While earnings were respectable in the first quarter, many companies warned of revenue shortfalls to come. Board rooms were active as M&A activity resumed including a few large global deals. IPOs appear to be back in favor as well.
Economically Speaking…After years in the doldrums, housing has taken the lead as the key economic growth sector as home sales have increased to levels not seen in years and prices continue to rise on shrinking inventories and higher demand. Manufacturing remains in expansion mode (barely) and inflation is far from the radar screen (for now). While the latest stronger-than-expected unemployment numbers relieved recent fears that the labor market was regressing, analysts will closely monitor such data for signs that the Fed is comfortable with its progress and may feel a change in its aggressive monetary policy could be in order (perhaps at one of the next policy meetings?). Additionally, rumors of the “death of the consumer” have been greatly exaggerated as retail sales climbed in its latest release and the sentiment/confidence readings have been impressive.
It’s a Small World…Japan experienced a bit of “too far too fast” in May as the Nikkei faced major profit-taking (over 7% decline in one day) late in the month from its sizable year-to-date run-up. Similarly, analysts are growing more concerned with China’s weaker than expected growth rate (that still would be the envy of most others). While some signs bring hope to the euro-zone, its aggregate unemployment rate stands at a record high; factory output is in contraction mode; and economic forecasts were revised downward. Still, a key official claims that the European Central Bank will maintain its aggressive policy “as long as necessary” and follow the Fed’s lead, a strategy that has proven quite successful domestically to the tune of a nice equity market winning streak.