Throughout the month of May, economic data came in negative as measured by the Citigroup Economic Surprise Index (CESI).  Despite reversing its negative trend into positive territory towards the end of April, the CESI trended down for much of May.  The index ended the month in negative territory and has continued on the same path through the beginning of June.

The ISM Manufacturing Index, which monitors the employment, production, new orders, and supplier deliveries of more than 300 manufacturing firms, continued its downward trend closing the month of May at 49.  The index has been moving steadily lower since March, and May marks the lowest reading since June 2009.  A reading below 50 implies a contraction in manufacturing activity.

  • Labor markets experienced a rough month throughout May.
    • Initial jobless claims increased roughly 8% through the month, going from 328,000 in early May to 354,000 by the end of the month.
    • The monthly ADP report found that the private sector created only 135,000 jobs in May, disappointing expectations of 165,000 jobs.
  • Consumer confidence continues to show signs of improvement.
    • The Consumer Confidence Index climbed from 69 in April to 76.2 in May.
    • The Consumer Sentiment Index followed suit, increasing to 84.5 from 76.4 in April.
    • Consumer attitudes continue to signal a bright outlook for the U.S. economy, as the Consumer Sentiment and Consumer Confidence indices have both increased approximately 15% since the end of 2012.
  • The housing market continues to provide consumers with positive news.
    • Housing Prices increased 1.4% from February to March, as measured by the S&P/Case-Shiller Index.
    • The Housing Market Index (HMI), which measures builder confidence for newly built, single family homes, increased 7% from 41 in April to 44 in May.
    • Housing data continues to act as the engine of positive economic data.

Central Banks

Speculation on central bank activity continued to have a significant impact on world markets throughout May.

  • In the United States, May 22nd marked the Dow Jones Industrial Average’s (DJIA) largest one-day swing since February as FOMC minutes were released.
    • Despite a 155 point rally following Bernanke’s morning commentary, the DJIA fell sharply as the FOMC minutes released in the afternoon pointed to a possible scaling back of its bond buying program.
    • Bernanke confirmed the possibility of a tapering off in June, but contingent on incoming economic data.
    • The DJIA suffered an intraday peak-to-trough change of -1.8% and a one-day loss of 0.8%.
  • Major central bank activity has caused central banks around the world to act, fueling concerns of potential currency wars.
    • Turkey’s central bank continued its monetary easing policy by cutting rates in order to counter unwanted currency appreciation.
    • The Bank of Israel cut its policy rate twice throughout the month as they have stated they would intervene in foreign exchange markets in order to fight an appreciation of the shekel.
    • The Bank of Thailand cut its policy rate by 25 bps to 2.5% over concerns of “tepid domestic demand” and expected slowing export growth.
    • Smaller economics continue to lower rates to combat possible negative side effects from quantitative easing measures lead by the Bank of Japan, U.S. Federal Reserve, and European Central Bank.


Volatility returned with a vengeance in May as global growth concerns, rising bond yields, and fears about the Fed’s tapering of QE purchases prompted investors to book profits from the extremely strong YTD rally in global equities.  There was also a violent reversal in leadership around the middle of the month, as rising yields in the U.S. and Japan drove a rotation from defensive, high-yielding sectors to cyclical areas leveraged to improving economic growth.  U.S. equities regained global leadership in May, as weak economic data from the emerging markets and uncertainty regarding Japanese monetary policy steered investors to the “cleanest dirty shirt”.  Conversely, Japanese markets significantly lagged global peers because of a spike in bond market volatility related to investor concerns that the BOJ was not purchasing an adequate amount of intermediate-term government bonds.  While the shift from fully-valued defensive investments toward cheaper growth-oriented cyclicals suggest an improving growth outlook, the ultimate sustainability of this trend will depend largely on a confirmation in June’s economic data, continued monetary support from global central banks, and improved earnings guidance from corporate leaders.

United States:
U.S. equity markets did not “sell in May and go away” as central bank support and attractive valuations relative to other asset classes continued to drive strong demand for stocks.

  • The NASDAQ Composite was the best performer among the major markets, gaining 3.8% in May as the index’s technology components came back into favor.
  • The S&P 500 rose 2.1% in May, while the Dow Industrials and Transportation Averages essentially kept pace with gains of 1.9% and 1.8% respectively.
  • While implied volatility increased steadily most of the month, the VIX jumped significantly higher on 5/31 and ended May up 20.4% at 16.3.  The surge appeared to break the VIX out of its depressed range, and may portend a deeper pullback entering the seasonally weak summer months.
  • Along with the return of volatility, there was a notable shift in leadership toward asset classes traditionally associated with increased risk tolerance.
    • Small and micro cap stocks outperformed their large cap peers by a wide margin as investors shifted positioning toward investments that are leveraged to the improving U.S. economic growth.
    • Style leadership was reversed in the large cap space as value outperformed.  This is largely attributable to the higher international earnings exposure of large cap growth stocks, where economic data was most disappointing and growth prospects more uncertain.
      • The U.S. dollar index rose 1.9% in May providing a headwind for companies with more international exposure.
    • This performance shift appears to be supportive of improving domestic economic growth in the second half of the year.


  • Despite continued poor economic data in the Eurozone, Germany (+3.4%), the Netherlands (+3.1%), and France (+2.4%) led all developed markets for the month.
    • In the Eurozone, Q1 GDP contracted by 0.2% from the previous quarter, reinforcing pressure on the ECB to spur growth on the heels of a rate cut in early May.
  • The biggest surprises were the declines in Japan (-5.7%) and Australia (-12.1%).  The Nikkei (local currency) was up 9.2% through mid-May, but ended the month down 0.6%.  A combination of profit taking, a weak Chinese PMI (49.2), and rising bond yields were the main culprits, despite repeated assurances from the BOJ that easing would continue.
  • The emerging markets index (-2.5%) continued its weak run for 2013, and all EM currencies (except for the Chinese renminbi and Hungarian forint) depreciated versus the U.S. dollar.
    • China appeared to shrug off the weak PMI print, with the MSCI China Index returning -0.9% and the local Shanghai composite up 5.8% for the month.  The economy is showing signs of a mild recovery with increased industrial production and property investment, but growth overall remains under pressure.
    • South Korea (+0.5%) was the strongest performer of the major emerging markets, though earnings growth remains weak in the face of depreciating Japanese yen.

Fixed Income

Interest rates experienced a pronounced move higher during May.  The sell-off centered on hawkish statements by members of the Fed.  Chairman Bernanke communicated that the FOMC will consider tapering its QE program in 2013 should the labor market continue to improve.  Market consensus was expecting the Fed to maintain its pace of purchases into 2014.  The adjustment was swift and reverberated across the fixed income markets.  Treasury yields rose across the curve.  Moves were especially pronounced in the middle of the curve where the 5 year and 10 year U.S. Treasury yields increased on a percentage basis by 50% and 28%, respectively.  Increasing interest rate volatility negatively impacted areas of fixed income where call options are prevalent such as MBS and high yield bonds.

Taxable Market:
The BC Aggregate Index, a proxy for high quality fixed income, lost 1.8% in May.  Rising Treasury yields were the main culprit.  Agency MBS underperformanced as investor anxiety over the end of the Fed sponsorship and duration extension concerns weighed on valuations.  With spreads unchanged, corporate credit slightly outperformed equivalent duration Treasuries due to greater yield embedded in these securities.

  • TIPS fell 4.4%.  Rising real rates were the main driver of underperformance.
  • Agency MBS lost 1.6% in May.  The sector underperformed as spreads widened with investors nervous of the Fed tapering QE.
  • Investment grade bonds lost 2.3%.  Performance was driven in rising Treasury yields as spreads were static.  Fundamentals in the space are deteriorating.  Revenue growth is flat and companies are taking on more debt with low borrowing costs.
  • High yield bonds fell 0.7%.  Spreads in the space started the month at 400 bps, a level last achieved in 2007.  Spreads failed to compress with rising Treasury rates and actually moved higher during May.
  • Leveraged loans gained 0.1% to post the best relative performance versus high yield bonds in recent memory.
  • Convertibles posted 2.6% due to equity market performance, and in particular, sector bias.  Defensive sectors such as consumer staples and utilities underperformed in the rising rate environment.  The convertible market was underweight to these issuers in favor of more cyclical sectors such as healthcare and information technology.

Municipal Market:
Intermediate municipals, as represented by the BC 1-10 Year Blend Index, lost 0.7%.  Munis outperformed Treasuries as muni yields rose less and ratios of muni yields to Treasuries compressed throughout the month.  Muni investors are becoming increasingly uneasy about rising rates.  Retail flow for high yield and long term muni funds are weakening relative to intermediate strategies.

International Markets:
International fixed income investors had a poor month.  The U.S. dollar was exceptionally strong in May.  Performance differentials were especially pronounced for EM and commodity centric currencies with notable laggards such as South African rand losing 11.1%, the Aussie dollar 7.7%, and the Brazilian real 6.5%.  The weakness of EM currencies in a rising rate environment is somewhat disconcerting given that many portfolios are positioned with the expectation of EM currency strength when interest rates rise.


Hedge Funds:
Alternative investments generated positive performance in May across a range of strategies.  Performance was generally led by Funds with a more directional focus, whether it be in equities or more event-driven traders.  This has been a consistent trend throughout the year given the persistent gains in equity markets, and those strategies are market leaders through the first five months of 2013.

  • Convertible arbitrage managers led hedge fund index performance during the month with a 2.8% return.  The underlying convert market has performed exceptionally well in 2013, rising 2.6% in May and up over 12% on a  year-to-date basis.
  • Event-driven strategies also continued to perform well in May, nearly matching the performance of the S&P 500.  Activist equity strategies as well as Distressed Funds, which are generally more unhedged in nature and perform better in strong equity markets, are contributors to the strategy.
  • Equity strategies generated mixed results in the quarter.  Market neutral was relatively flat in the quarter, while long-biased equity hedge managers posted a gain of 80 bps.
  • Macro strategies struggled in May, contributing to a disappointing 2013 performance.  Losses in May were generally concentrated in the latter part of the month, coinciding with the back-up in rates and the reversal in the Japanese equity and currency markets.

Liquid Alternatives:
Alternative Investment mutual funds posted mixed performance in May, largely in line with traditional hedge fund indices.

  • Long/short equity was the best performing category, gaining 1.0% in the month and capturing slightly less than half the equity market upside.  Long/short equity mutual funds are outperforming their hedge fund counterparts through the first five months of the year.
  • Managed futures were the worst performer, with most of that loss occurring towards the end of the month.  Equities were mostly a positive contributor to performance, with the exception of Japan, where the strong uptrend in performance ran out of steam and sold off sharply.  The area of losses for managed futures occurred in bonds and interest rates.

Liquid Real Assets:
A backup in interest rates reverberated through the liquid real asset markets in May, with REITs taking the brunt of the damage as investors rotated out of dividend payers.  Commodity declines continued, driven lower by a strong dollar and weakness in precious metals and energy.

  • Crude oil fell 1.8% during the month, primarily due to a lack of significant geopolitical flare-ups.  Supply disruptions in Yemen and North/South Sudan were alleviated while Chinese demand failed to surprise to the upside.
  • Natural gas fell 9.4% after a torrid start to the year due to warmer weather forecasts and greater than expected pipeline injections.
  • For precious metals, the exodus out of gold continued, with net redemptions out of exchange traded products nearing 120 tons in May (more than 500 tons YTD).  As a reminder, annual gold mine production is less than 3,000 tons.
  • MLPs were in positive territory until the last week of May, when they fell nearly 5% to end the month down 2.1%.  There were no MLP-specific drivers for the decline, outside of several large equity issuances that were widely expected by the marketplace.  The apparent catalyst was the significant backup in 10-year Treasury yields, which ended the month 40 bps higher.  Treasury spreads narrowed by only 25 bps, similar to the compression experienced in both the high yield equity and corporate bond spaces.  MLPs ended the month with a 5.9% yield, which is approximately 375 bps above the 10-year Treasury.  The historical spread is approximately 300 bps.
  • The MSCI US REIT index tumbled 5.9% in May after a strong start to the year, primarily due to the aforementioned backup in rates.


This material represents an assessment of the market environment at a specific point in time 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 stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.