The S&P 500 finished higher for the third consecutive month and moved into positive territory for the year. The three-month winning streak, in which the S&P 500 gained 25.8 percent, is the biggest three-month gain since August 1938. With financial market conditions improving, investor confidence is growing as is the expectation for an eventual recovery in the global economy.
The VIX index, which is often used to gauge fear and volatility in the market via the prices investors are willing to pay for protective options, slid below 29 for the first time since last September. Although the measure has greatly improved from the end of 2008, when the index was in the high 70s and low 80s, the VIX remains well above the historical norm.
All asset classes posted gains in May, led by commodities and emerging markets. Commodity shipping rates, as measured by the Baltic Dry Index, suggest world trade is starting to pick up. The Baltic Dry Index jumped to an eight-month high after falling 94 percent in the second half of 2008. Oil futures had their biggest monthly percentage gain in a decade, up 29.7 percent. The rise in commodity prices signals that reflationary policy is gaining traction.
Emerging markets have been outperforming developed international markets this year due to healthier financial institutions, cheapened currencies, current account surpluses, and faster economic growth. China’s $4 trillion yuan ($586 billion) stimulus aimed at reviving the world’s fastest growing economy has been met with high levels of optimism. Demand is also expected to increase in India as the government increases investments in ports, roads, and bridges. Expectations are very high, maybe dangerously high, so any pullback would not be surprising.
Supply concerns and a stronger stock market forced Treasury yields higher. The longer end of the curve underperformed as the Fed’s efforts to keep longer term rates lower proved to be ineffective. Higher yielding longer-term Treasuries filtered into the mortgage market, bringing the 30-year fixed rates to 5.11 percent, up from 4.55 percent a month ago.
Peter Lazaroff, Junior Analyst
Cliff Reynolds, Junior Analyst
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