Trade, summits, and elections impact international equities
U.S. equities outperformed international in May, as foreign stocks saw a pullback. Increased volatility continued, as political risk continued to increase. The administration’s approach to global trade, back and forth potential meetings with North Korea, and the uncertainty around Italian politics were a few of the major themes. Contrary to international markets, the U.S. had their best performing month since January, while fundamentals were better than expected, showing the positive effects tax reform is having on corporate earnings. Small cap equities outperformed large caps, while investment grade outperformed high yield, as spreads tightened throughout the month. The Federal Open Market Committee (FOMC) met in May and officials stated that they’re considering raising rates again in June, while economic growth indicators remained strong.
The yield curve flattened over the month, as both long- and short-terms rates fell, after a brief jump in the middle of the month. The 10-year rate crossed 3% again, before pulling back at the end of the month. Credit spreads tightened throughout the month, as yields fell for high yield and investment-grade bonds. The dollar finished the month stronger against most major currencies and oil prices hit new highs before pulling back at the end of the month.
On the economic front, the second estimate of gross domestic product (GDP) was 2.2%, which came in below expectations. Headline inflation increased to 2.1%. Employment gains increased but fell short of expectations. Consumer confidence increased and met expectations.
Hedge funds posted positive results with the broad index (HFRI Hedge Fund of Funds Index) up for the month. Seven out of the eight strategies had positive returns, with Merger Arbitrage and Relative Value leading the way up 0.77% and 0.58%, respectively. Global Macro was down 0.36% for the month.1
Key Economic Data1
- The U.S. Bureau of Economic Analysis (BEA) released the “second” estimate of real gross domestic product (GDP) growth of 2.2% in the first quarter of 2018. Real GDP grew by 2.9% in the fourth quarter of 2017, 3.2% in the third quarter, and 3.1% in the second quarter of 2017.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was down 0.2%. Core inflation (CPI-Ex Food and Energy) was 0.1%. For the last 12 months, the CPI-U NSA was 2.5% and the CPI-Ex Food and Energy was 2.1%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 164,000 after increasing a revised 52,000 jobs in the prior month. Private sector payroll employment gained 168,000 jobs following a revised increase of 51,000 jobs in the prior month. The unemployment rate was 3.9%. The underemployment rate was 7.8%. The labor force participation rate was 63% last month.
- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 662,000, a change of -1.5%. Housing starts were 1,287K, a change of -3.7%. Building permits were 1,352K units, a change of -1.8%. Existing home sales were 5.46 million units, a change of -2.5%.
- The Conference Board Consumer Confidence IndexTM was 128.
1. IndexIQ, FactSet, as of 5/31/18.
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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds that involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.
Distressed/Restructuring strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.
Global Macro strategy is a strategy that bases its holdings, such as long and short positions in various equity, fixed-income, currency, commodities, and futures markets, primarily on the overall economic and political views of various countries, or their macroeconomic principles.
Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two securities.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.
The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The U.S. Consumer Price Index (CPI) is a set of consumer price indices calculated by the U.S. Bureau of Labor Statistics (BLS). To be precise, the BLS routinely computes many different CPIs that are used for different purposes. Each is a time series measure of the price of consumer goods and services.
Consumer Price Index for All Urban Consumers (CPI-U) – A measure that examines the changes in the price of a basket of goods and services purchased by urban consumers.
The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”
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