Executive Summary – Download the Full Market Outlook

US large caps moved smartly higher in May, fueled by a positive blend of favorable earnings results and steady improvement in economic fundamentals.  The S&P 500 advanced 2.4 per cent for the month putting the blue chip index into positive territory for the year.

Small caps surged more than 6 per cent last month in response to escalating trade tensions and international uncertainties.  Investors view the Russell 2000 as the best way to play domestic growth.  Smaller, domestic companies were among the biggest beneficiaries of the recent reduction in corporate tax rates.

International large caps suffered a 2.2 per cent pullback in May, dragging the index into negative territory for the year.  The move was prompted in response to a stronger dollar and political uncertainties in Europe; most notably in Italy and Spain.

Emerging market equities suffered the largest downdraft last month, dragging them down more than 2 per cent for the year.  The reversal was in response to a one-two punch of dollar strength and geopolitical uncertainties, particularly escalating trade tension with China.

Interest rates slipped last month, pushing the 10-year Treasury yield back below 3 per cent.  The shift was in response to modest growth and tepid inflation readings domestically.  Geopolitical uncertainties in Europe help boost demand for US Treasurys as well.

High yield bonds flatlined last month as credit conditions deteriorated.  Corporate bond spreads widened in May as lenders became increasingly reticent about extending credit to lower quality borrowers.  This is a trend that bears watching.


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