Global Macro Environment
Green Shoots Appearing in the Global Economy
The global economy has received encouraging news of late that could signal a bounce back. First let’s begin with the US. Friday’s jobs report indicated the economy may be able to pull out of the downturn faster than expected. Data showed the economy defied expectations as payrolls rose by 2.5 million in May.The unemployment rate declined from 14.7% to 13.3%, which is still a staggering absolute number, but much better than consensus views. The underemployment rate (U‐6 rate) is currently 21.2% vs. the previous 22.8%. On the downside, the permanent jobs lost number continued to rise and stands at 2.3 million. Even amidst this encouraging report, high unemployment should not be discounted as a headwind for normalization. The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) improved month‐over‐month to 43.1 in May from 41.5 in April. The ISM Non‐Manufacturing PMI also rose month‐over‐month to 45.5 in May from 41.8 in April, a hopeful sign the sudden shock to the US economy from COVID‐19 is beginning to abate. The April reading ended 122 consecutive months of expansion for services‐related activity. Another expansion record was broken as the National Bureau of Economic Research (NBER) declared the US entered into a recession in February. The expansion, which began in June 2009 and lasted 128 months, was the longest on record.
In Europe, countries are re‐opening and implementing more stimulus measures, which are making their way to the data. Business climate and economic sentiment for May both improved from rock‐bottom levels seen the past two months. The IHS Markit Eurozone PMI Composite Output Index, which includes manufacturing and services, bounced back in May to 31.9 from the series low of 13.6 in April. Three of the four biggest economies all posted three month highs beginning with Italy (33.9), France (32.1) and Spain (29.2), while Germany (32.3) hit a two month high.
China continues to stand out as the only country operating in expansion territory. Easing of restrictions for business operations is helping lead new orders higher and client demand is improving. If global demand continues to improve, the economy in China could recover to the pre‐virus levels quicker than anticipated. However, geopolitics could be a major headwind. Tensions with the US include Hong Kong, Huawei and the World Health Organization.
Next Generation European Union Proposal
The European Commission has announced a recovery program of 750 billion euros (about $847 billion) to support its member states and those economies hit hardest by COVID‐19. This recovery program, along with a 1.1 trillion euros budget proposal over the next seven years, is being led by Germany, which is typically reluctant to support fiscal transfer programs. The European Central Bank also announced the expansion of its bond‐buying program beyond $1.5 trillion, putting the central bank’s stimulus effort on par with the Federal Reserve.
US equities continued to rise in May as the S&P 500 gained (+4.8%), which puts the rally for the index from the March 23 lows at (+36.6%). Positive sentiment around the US economy re‐opening continues to power the market with support of massive intervention by the Federal Reserve. Businesses are eager to get back and demand is picking up among the US consumer. Growth stocks continue to outperform on the back of lower real rates as large cap growth (+6.7%) outperformed large cap value (+3.4%). Small cap (+6.5%) outperformed large cap (+5.3%) in May, but the spread year to date (+11.0%) still favors large corporations. However, this trend could reverse as the economy re‐opens. All S&P 500 sectors had positive performance in May as information technology (+7.1%) led while consumer staples (1.5%) lagged.
Developed international equities were up (+4.4%) at the end of May, while emerging markets finished slightly positive at (+0.8%). The German market had strong performance for the month (+12.4%) on the hope the global economy continues to show signs of improvement.
The 10‐year treasury yield reversed course in May and rose to 0.7% from 0.6% in April. Yields on the longer end of the curve, 10 to 30 year, have shown a slow steepening trend. The most probable cause of this is the optimism around the economic re‐opening. The Bloomberg Barclays US Aggregate Index rose (+0.5%) during the month. The municipal market had strong performance in May as the Bloomberg Barclays Municipal Aa+ 1‐ 10 Year index rose (+2.6%). The finances of states and local municipalities across the country will be a key data point in assessing the impact of the quarantine on tax revenues.
Real assets continued to deliver positive returns in May. Master Limited Partnerships (+9.0%) had the strongest performance followed by natural resources (+3.7%) and real estate (+0.2%). Oil (+88.1%) registered its best month on record as demand expectations increased and further supply adjustments were made by OPEC and non‐OPEC producers.