May 2017 Monthly Summary
- Equity Market Risk Odometer rises to historically rare high reading
- Equity and bond markets rally. International equity markets continue to lead
- Inflation indicators cool
- Fired FBI director creates further controversy for Trump administration
Equity Market Risk Odometer: The Equity Market Risk Odometer finished the month was a net reading of +6. Readings this high are historically rare (<5%) and associated with higher probabilities of positive equity market price action going forward. All categories were pointing toward bullish readings other than CFTC positions which showed a neutral reading at the end of May. The breadth of the positive signs also provides credibility to the overall bullish stance. Market analysts have laid caution based on the markets valuation but our more-timely market indicators have not surfaced warning signs yet.
Markets: The month of May continued previous trends from this year with international indices outperforming domestic indices. International developed and emerging markets rose 3.7% and 3.0% on the month, bringing their totals to 14.0% and 17.3% on the year. Domestic equity indices were mixed on the month, with the benchmark S&P 500 up 1.4% but small cap stocks down 2.0%. The technology heavy Nasdaq 100 was up 3.9% on the month and remains the leading index within the domestic market. The bond market continues to heal after sharp losses at the end of 2016. The benchmark aggregate bond market index rose 0.8% in May, bringing its YTD total to 2.4%.
Economic Developments: Overall, the global economy continues to display near trend growth. US economic developments in May were generally positive and labor market indicators continue to point towards healthy conditions, paving the way for further rate hikes from the Fed. Inflation and wage growth have slowed from higher readings earlier this year. Inflation readings continue to remain below the Fed targets leading some to question why the central bank continues to point toward further rate increases. The Fed remains convinced that strong labor market conditions will soon create wage pressure and eventually move inflation towards their target. The Fed also vowed to look past first quarter economic weakness, describing it as “transitory”, and in their post-meeting Minutes, hinted towards another rate hike in June. The biggest developments in the month again circulated around politics as the Trump administration fired FBI director James Comey, and controversy swirled around Comey’s response that the president asked him to drop an investigation of former National Security Advisor, Michael Flynn. Despite the short-term volatility this created, the benchmark volatility VIX index (“Fear Index”) quickly recovered and dropped to a 24 year low.