May 2018 Investment Commentary
April provided a reprieve for U.S. stocks after back-to-back monthly losses in February and March. Larger-cap U.S. stocks gained a modest 0.4 percent (Vanguard 500 Index), while smaller-cap U.S. stocks earned 1 percent—tipping them back into the black (up 0.8 percent) year to date (iShares Russell 2000 ETF). There was a fair bit of return dispersion among the different sectors. Energy was the top performer, up more than 9 percent, buoyed by oil prices nearing $75 per barrel. Meanwhile, consumer staples fell more than 4 percent for the month. Several factors contributed to the drop, including higher input costs that have proven difficult to pass on to consumers and e-commerce competition from companies like Amazon.com. Rising interest rates have also made these mature, dividend-paying companies less attractive investments relative to bonds.
Developed international markets outpaced U.S. stocks in April, gaining 1.3 percent (Vanguard FTSE Developed Markets ETF), and European stocks returned 2.1 percent (Vanguard FTSE Europe ETF). Broadly speaking, the U.S. dollar strengthened against most currencies during April, resulting in stronger returns for dollar-hedged investors in foreign markets. Emerging-market stocks (Vanguard FTSE Emerging Markets ETF) did not fare as well in April, notching a 2.8 percent loss on the back of continued trade tensions and concerns about the U.S. dollar’s recent resurgence (which is a risk for emerging-market countries with dollar-denominated debt because it increases those servicing costs).
Rising interest rates in April led to another round of losses for core bonds. For the first time in over four years, the U.S. 10-year Treasury yield closed above 3 percent (before falling back below that level in recent days). The Treasury curve continues to flatten—the yield spread between two-year and 10-year Treasuries is now less than 50 basis points. U.S. core bonds fell 0.8 percent in April, which brings their year-to-date loss to 2.3 percent (Vanguard Total Bond Market Index). U.S. high-yield bonds and floating-rate loans saw positive returns in April of 0.7 percent and 0.4 percent, respectively (ICE BofA Merrill Lynch U.S. High-Yield Cash Pay Index and S&P/LSTA Leveraged Loan Index).
The relative returns of our active portfolios were favorable in April. Performance was helped by stronger foreign markets, particularly European stocks. On the fixed-income side, our active bond managers bested the core bond index, adding to performance.
—OJM Group Investment Team