Economic Backdrop

Economic growth showed measured improvement globally, and inflation stayed below target in most regions. As a result, central banks remained committed to accommodative policies with additional stimulus measures varying by region. In the U.S., the Federal Open Market Committee (FOMC) continued a planned reduction in the size of its bond purchase program in May to a total of $55 billion, as purchases of mortgage-backed securities (MBS) and longer-term Treasury securities were pared by $5 billion each. Minutes from the latest FOMC meeting emphasized planning for eventual policy normalization and the importance of communication once it gets underway, despite acknowledging that continued expectations for suboptimal inflation and labor market conditions will likely keep benchmark rates low. The European Central Bank (ECB) also maintained historically low interest rates, while expressing comfort with the prospect of increasing future economic stimulus if warranted. The Bank of England kept interest-rate and asset-purchase targets unchanged, but minutes from the latest Monetary Policy Committee meeting revealed a growing preference for accelerating anticipated interest-rate increases. Finally, the Bank of Japan reaffirmed its commitment to low rates and intention to continue money market operations with an aim of closing the shortfall from its inflation target.

In the U.S., initial jobless claims looked set to finish May close to where they began. Continuing unemployment claims, however, set consecutive post-recession lows throughout the month. Purchasing managers reported increased manufacturing activity in initial May readings, appearing to retain year-to-date momentum based on strength in new orders. Non-manufacturing growth increased more than expected in April, driven by the highest new orders since last August and strong exports. Producer prices showed an increase in April, surpassing consensus expectations, as consumer prices rose an expected 0.3%, picking up from March’s pace with a 2.3% rise in gasoline prices. Personal income moderated in April, increasing by 0.2%, while consumer spending fell 0.1%. On the real estate front, new home sales impressed, existing home sales increased and pending home sales missed in the month of April. Meanwhile, real first-quarter gross domestic product was revised further downward than expected, to -1.0% on an annualized basis, with weakness attributed to harsh extended winter conditions.

U.K. retail and wholesale distribution growth slowed abruptly in May. Weak expansion of sales volumes, orders and inventories indicated a potential reversal of the recent strength that propelled April’s year-over-year retail sales growth to multi-year highs. Manufacturing, on the other hand, appeared to carry its recent health forward to May based on early reports. Orders remained flat, but output and expected production maintained high readings. Unemployment continued its downward trend in April with a lower-than-expected claimant count, and the jobless rate fell to its lowest level since 2008. Year-over-year personal income growth disappointed, however, while consumer prices rose for the first time since last June. Services grew more than expected in April with the highest business activity reading of 2014. Meanwhile, mixed April house price data was still strong enough for the Bank of England to suggest that rising real estate prices may require a review of mortgage issuance practices.

The Eurozone mood lightened in May amid rising economic sentiment and consumer confidence. Purchasing managers reported preliminary growth figures in line with expectations for May, indicating the business expansion trend dating back to last July could still be intact. Consumer prices rose slightly in April, but still showed decreases in seven member states. At a national level, Germany’s current economic conditions assessment for May improved despite falling business expectations. German unemployment increased in April, reversing several months of declines, while job vacancies shrank. Next door, consumer purchases of manufactured goods in France remained flat for April despite recent strength, as contracting demand for textiles weighed heavily on the overall figure. French producer prices continued to decline in April, with utilities showing the greatest weakness. Lastly, Spain and Greece received credit rating upgrades based on improved economic prospects.

Market Impact

Global bond yields generally fell in the month (yields move inversely to prices) as most major markets—U.S., U.K., Japan and the Eurozone—experienced a decrease in 10-year government bond yields. In this environment, longer-dated bonds performed best. Within investment-grade debt, corporate bonds outpaced government bonds, while the securitized markets (asset-backed securities and MBS) trailed but posted positive results as well. Outside of investment-grade debt, emerging-market debt performance was strong as the asset class continued to build on its momentum from the latter half of the first quarter. High-yield bonds also contributed, leading global government bonds, but lagging investment-grade corporate bonds.

In a market of declining bond yields, global equity markets showed resilience and were again positive. Optimism for growth in Europe continued to drive the region’s gains, despite dragging on developed market performance, which underperformed emerging markets as a whole. Returns were positive across all sectors of the MSCI AC World Index. Regionally, investors witnessed a reversal in Asia Pacific, with markets in Japan and Hong Kong delivering two of the month’s most impressive performances. In emerging markets, Latin America faltered, detracting from returns elsewhere.

Index Data

  • The Dow Jones Industrial Average Index returned 1.19%.
  • The S&P 500 Index increased 2.35%.
  • The NASDAQ Composite Index returned 3.30%.
  • The MSCI AC World Index, used to gauge global equity performance, increased by 2.13%.
  • The Barclays Global Aggregate Index, which represents global bond markets, returned 0.59%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” decreased in the month as a whole, moving from 13.41 to 11.40.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $99.74 a barrel at the end of April to $102.71 on the last day in May.
  • The U.S. dollar strengthened modestly against the euro and sterling, while it was relatively flat versus the yen. The U.S. dollar ended May at $1.37 against the euro, $1.68 versus sterling and at 101.75 yen.


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.

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.