Serve and volley

by: , Chief Investment Officer and Managing Director | IndexIQ; IndexIQ,


  • In May U.S. equity markets (S&P 500 Index) fell -6.35% in what seems mostly self-inflicted due to the rising trade war rhetoric with China. Domestically focused U.S. Small Caps didn’t offer a haven as they were also caught in the moment, falling -7.78% (Russell 2000 Index).
  • On the side-lines, international developed markets (MSCI EAFE Index) were relatively better at -4.80% while Teresa May announced her resignation as Prime Minister and elections in Australia reaffirmed their incumbent candidates.
  • Emerging market equities (MSCI Emerging Markets Index) underperformed within the international markets, falling -7.26%, largely influenced by China which was down -13.09%.
  • The Renminbi was under pressure during the month with the spot FX falling -2.47%. The Mexican Peso was also down -3.44% as tariffs were proposed to stem migrant immigration.
  • Treasury yields have fallen quickly as safe havens were sought. Broad U.S. Treasuries (Bloomberg Barclays U.S. Treasury Bond Index) were up 2.35% in May while credit (Bloomberg Barclays U.S. Corporate High Yield Credit Index) underperformed. While investment grade (Bloomberg Barclays U.S. Corporate Investment Grade Credit Index) was up 1.78%, high yield (Bloomberg Barclays U.S. Treasury Bond Index) fell -1.39%. Spreads widened for both classes.
  • Broad commodity spot prices were down -3.76% with oil spot prices down -15.93% on increasing inventory and industrial metals down -6.07% on possible growth slowdown. Precious metals were marginally positive at 0.87%.
  • Of the eight hedge fund strategies tracked, only Fixed Income Relative Value (HFR Relative Value Index) was positive at 0.18%. Event-Driven Distressed (HFR Distressed/Restructuring Index) was flat at 0%. Equity Hedged (HFR Equity Hedge Index) was the largest underperformer at -1.88%. (The remaining tracked hedge fund strategies are represented by the HFR Equity Market Neutral Index, HFR Event Driven Index, HFR Macro Index, HFR Relative Value Index, and the HFR Convertible Arbitrage Index.)

Economic Data

  • Headline CPI was up 0.3% MoM and 2.0% YoY while Core CPI (ex Food and Energy) was up 0.1% MoM and 2.1% YoY.
  • Q1-2019 GDP was confirmed at 3.1% (QoQ), down 0.1% from the initial Q1 announcement of 3.2%. Q4-2018 GDP was at 2.2%; Q3-2018 at 3.4%; Q2-2018 at 4.2%.
  • The latest employment figures show a tight labor market with Unemployment at 3.6%, down from 3.8% at the prior release and Average Hourly Earnings up 3.2% YoY.
  • JOLTS Job Openings surprised above the survey level (7350) at 7488. The prior release was 7087.
  • In Housing, sales have fallen MoM, with New Home Sales down -6.9% and Existing Home Sales at -0.4%.
  • In Retail, April Inventories rose while Retail Sales ex Auto and Gas were down -0.2%.
  • Latest (Preliminary) Durable Goods Orders show a similar trend, down -2.1%, with the April Final PMI at 52.6.
  • The latest (Preliminary) US Services PMI came in at 50.9.
  • The University of Michigan Sentiment Index latest release was 100 while the Conference Board Consumer Sentiment Indicator was 134.1.

Central Bank

  • The two-day Fed meeting concluded on May 1st resulting in short-term rates remaining unchanged at 2.50%.
  • The recent Core PCE for Q1 was revised to 1.0% from 1.3%.
  • While measures of employment seem strong, Unit Labor Costs have fallen -0.9%, indicating core inflation isn’t getting a firm foothold as seen by the lower Core PCE level.
  • The Fed remains aware of the fundamental underpinnings for inflation and unemployment while monitoring the growing trade tensions to inform its rate policy. Consensus, however, is rising that a rate cut may be increasingly likely.

Serve and Volley

May was witness to the escalating trade war and the use of tariffs beyond trade negotiations. May 13 was the second worst day in 2019, dropping -2.41%, following China outlining its retaliatory response to the growing trade dispute. With talks essentially stalled, the administration announced an executive order essentially blacklisting companies like Huawei and ZTE. This volley by the U.S. to place sanctions on Huawei placed added pressure to the semi-conductor space. In response, China has placed the export of rare earths in play and was similarly working on its own company blacklist.

While a Trump-Xi meeting at the next G-20 meeting is possible to address the impasse, the recently signed USMCA didn’t solve all of Mexico’s trade problems. With the deal due for vote in Congress and meant to replace NAFTA, the president has now threatened a 5% tariff on Mexico to target migrant immigration to the U.S. This tactic may well signal the mounting geopolitical risks in play as a simmering trade “cold war” may begin to weight on automobiles, semiconductors, and agricultural goods.

In the U.K. a defeated Theresa May resigned on May 24 effective June 7. With Brexit incomplete and a leadership void in place, May’s political opponents are now positioning themselves as her replacement. The MSCI UK Index (LOC) was down -2.78% in May.

As these and other events continue to unfold, uncertain outcomes are possible. While the recent drawdown in May was less than the drawdowns in September 2018 and November 2018, market breadth in May was negative while breadth in September and November 2018 were positive. This may be a signal of future volatility as answers to these uncertainties evolve.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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 Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.

The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.

The MSCI Emerging Markets Index captures large and mid-cap representation across 24 emerging markets countries.

The Bloomberg Barclays U.S. Corporate Investment Grade Credit Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes U.S. dollar-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

The Bloomberg Barclays U.S. Corporate High Yield Credit Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

The Bloomberg Barclays U.S. Treasury Bond Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index.

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.

U.S. Treasuries are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.

The HFR Equity Hedge Index measures strategies that 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.

The HFR Equity Market Neutral Index measures strategies that employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale.

The HFR Event Driven Index measures strategies that are designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.

The HFR Distressed/Restructuring Index measures 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.

The HFR Merger Arbitrage Index measures strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction.

The HFR Macro Index measures strategies that base 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.

The HFR Relative Value Index measures strategies 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 HFR Convertible Arbitrage Index measures strategies often employed by hedge funds that involve the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.

The U.S. Fed Funds Rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.

The Consumer Board 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.

The MSCI United Kingdom (UK) Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 96 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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IndexIQ, a New York Life Investments Company, is a trusted provider of innovative financial solutions. IndexIQ ETFs are built and delivered in a way that provides exposures that investors can rely on. A subsidiary of one of the oldest and largest life insurance companies in the world, we have a solid foundation and the resources to continue our culture of innovation…

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