Market Commentary

Weekly Market Commentary June 4, 2018

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The two big news items last week were a strong U.S. jobs report and a political compromise in Italy that reduced the risk of a referendum on staying in the EU. Both are covered in the market fundamentals section below. In addition, the U.S. reversed its position and announced steel sanctions against many of its closest trading partners. The S&P 500 rose 0.5%. The MSCI ACWI dropped 0.1%, and the Bloomberg BarCap Aggregate Bond Index climbed 0.2%.

Key points for the week

  • U.S. markets performed well in May.
  • U.S. jobs numbers were stronger than expected, while inflation remains in check.
  • Trade risks increased as allies were targeted with sanctions.
  • Italy avoided a referendum on staying in the European Union.

Economic Fundamentals

The U.S. jobs report testifies to the overall strength in the economy. Employers created 223,000 jobs, surpassing expectations of 188,000. The unemployment rate dropped to 3.8%, and the report showed wages have climbed a healthy 2.7% over the last year. Black and Latino unemployment continues to reach record lows, and additional economic reports last week suggest those earning the lowest wages are seeing the highest percentage increases in earnings.


European Markets

Italy’s economic recovery has been the opposite of the U.S.’s strong rebound. Its GDP per capita is below what it was in 1999, lagging even Greece. In response to the poor performance, Italian voters rewarded two antiestablishment parties in recent elections. While the parties come from opposite ends of the political spectrum, they were able to form a governing coalition.

Italy’s president vetoed the coalition because of concerns the proposed economic minister’s euro-skeptic view could endanger Italy’s membership in the common currency. The veto essentially collapsed the newly formed coalition and raised the risk of new elections that would become a referendum on the euro. Rather than run the risk of new elections, the coalition opted to rotate in a more acceptable economic minister. Our view remains that international stocks are attractive, but we continue to watch political risks carefully.


Market Performance

May was a very strong month for U.S. investors. The S&P 500 rose 2.1%, and the Aggregate Bond Index rose 0.7%. Turmoil in Europe and concerns over slowing growth pushed international stocks lower. The MSCI ACWI slid 0.2%. Small stocks performed particularly well, pushing the Russell 2000 Index, which tracks smaller companies, 5.9% higher. Strong U.S. economic performance and potential trade risks caused investors to bid up shares of smaller companies, which are affected less by trade than larger firms.

For the year, the S&P 500 is up 2.3% and the MSCI ACWI is down 0.1%. The Aggregate Bond Index is down 1.8% as concerns over higher rates have pushed prices of existing bonds lower.


Fun story of the week

Bearded Men Taking Selfies

A new mini-trend on Twitter is for bearded men to take selfies of their chins rather than looking at the camera. The modest innovation drew a number of similar photos and responses. For those of you who say social media is contributing negatively to the overall culture, you will find this article affirming.


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