Market Outlook – May 2018

Executive Summary

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US large caps edged fractionally higher in April, breaking a 2-month losing streak.  Investors, concerned that trade disputes could dent US exports, shied away from multi-national companies.  Small caps, viewed as somewhat insulated from trade, rose roughly 1 per cent for the month, leaving them nearly 1 per cent ahead for the year.

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International markets, fueled by a 10 per cent-plus rally in energy stocks, picked up 2.4 per cent in April; shifting the index into positive territory for the year. Emerging markets gave up 0.4 per cent last month as trade fears gripped investors.

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Master Limited Partnerships surged more than 8 per cent last month against a backdrop of rising interest rates. Oil prices spiked nearly $5 to $68 per barrel on supply concerns related to Middle East tensions and strong domestic demand.

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Q1/2018 earnings season has been remarkably strong. Companies collectively are expected to see their profits expand more than 20 per cent over the last 12 months. 80 per cent of reporting companies have beaten their profit forecast so far this quarter. That’s substantially higher than the 70 per cent rate registered historically. More impressive, however, is that nearly 64 per cent of companies reporting bested their revenue expectations. That figure historically stands at 45 per cent. Note that revenues are influenced by economic activity, not lower tax rates.

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US investment-grade bonds slipped 0.7 per cent last month as the benchmark 10-year Treasury approached a 3 per cent yield. Municipal bonds slid in sympathy.

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High yield bonds was the only fixed income asset class to gain ground last month as their higher yields cushioned their holders from higher underlying rates.