Two “Data” topics to discuss with you today:
Item #1: May price performance data across asset classes, geographies and US large cap equity sectors, with a few comments on each.
First up, major asset classes with YTD price performance also noted:
- Global equities (MSCI All-world): +1.5 percent (+11.3 pct YTD)
- US bonds (Barclay’s Aggregate): +0.1 pct (-3.3 pct YTD)
- Non-US sovereign debt (FTSE Index): +1.1 pct (-3.8 pct YTD)
- Emerging market bonds (JP Morgan Index): +0.6 pct (-3.7 pct YTD)
- Gold: +7.8 pct (-0.3 pct YTD)
- Silver: +7.9 pct (+5.2 pct YTD)
- Oil (WTI spot): +4.3 pct (+40.1 pct YTD)
Comment: Everything worked in May to some degree, from stocks to bonds (even if just a little) to commodities. Still, the YTD returns tell the more correct long-term story in our view. Bonds are a tough place to be and barring a geopolitical shock that will remain the case. Equities are both a recovery and reflation trade as long as inflation remains inside the guardrails (3-4 pct transitory, 2-3 percent past that). We also continue to like gold, which now that virtual currencies have hit a rough path should see incremental investment flows.
Equity returns by geography:
- US large caps (S&P 500): +0.7 percent (+12.2 pct YTD)
- US small caps (Russell 2000): +0.3 pct (+16.3 pct YTD)
- MSCI EAFE (non-US developed economies): +3.5 pct (+11.2 pct YTD)
- MSCI Japan: +1.7 pct (+0.9 pct YTD)
- MSCI UK: +3.9 pct (+16.2 pct YTD)
- MSCI France: +5.4 pct (+18.0 pct YTD)
- MSCI Germany: +3.4 pct (+13.6 pct YTD)
- MSCI Emerging Markets: +1.6 percent (+8.4 pct YTD)
- MSCI China: -0.2 pct (+3.8 pct YTD)
- MSCI Taiwan: -3.4 pct (+20.4 pct YTD)
- MSCI South Korea: +1.6 pct (+8.6 pct YTD)
Comment: European equities played catch-up to US stocks in May (and are now ahead YTD), while EM continues to sputter. We still like UK equities for their exposure to Energy, Financials and Industrials (30 percent of the index). As for EM, we remain cautious on China and favor Taiwan and South Korea as traditional EM global economic recovery plays.
US Large Cap Equity Sectors (in order of May performance, YTD noted):
- Energy: +5.7 pct (+43.1 pct YTD)
- Materials: +5.1 pct (+22.2 pct YTD)
- Financials: +4.8 pct (+29.7 pct YTD)
- Industrials: +3.1 pct (+19.2 pct YTD)
- Health Care: +1.9 pct (+7.2 pct YTD)
- Real Estate: +1.1 pct (+20.4 pct YTD)
- Consumer Staples: +1.8 pct (+4.6 pct YTD)
- S&P 500: +0.7 pct (12.2 pct YTD)
- Communication Services: -0.4 pct (+16.8 pct YTD)
- Technology: -0.9 pct (+5.9 pct YTD)
- Utilities: -2.4 pct (+3.3 pct YTD)
- Consumer Discretionary: -3.4 pct (+7.3 pct YTD)
Comment: May was a textbook case of cyclical rotation at the top and bottom of the performance table. This confirms trends that have been in place most of the year and which we expect to continue. We still like Energy, Financials and Industrials and remain cautious on rate sensitive groups like Utilities and Consumer Staples.
Final thought on May/YTD performance: broadly speaking, we’ve had a year’s worth of global equity performance in just 5 months. This should not be especially surprising given fiscal/monetary stimulus plus now European reopening. Still, May’s fixed income performance, which was not bad all things considered, gave the month a tailwind for equities that will be hard to repeat.
Item #2: We’ve been analyzing capital markets long enough to never put much stock in Washington DC infrastructure initiatives, but if something is going to happen it needs to happen soon – like this month. This topic has been around since Inauguration Day 2021, and it’s not yet seen much momentum. That reminds us very much of the early 2010s, the last time everyone got excited about Federal infrastructure investment but nothing actually happened.
Still, this topic got us wondering about how President Biden’s Gallup approval rating is faring, because popular presidents can sometimes get big ideas across the finish line even in a contentious political environment. Here’s the data:
- Current approval rating (May 3 – May 18): 54 percent. This ties Biden’s worst rating to date (March 1 – 15). His high-water mark is 57 percent (Inauguration week and April 1 – 21). Yes. It’s a tight range.
- Average for all elected presidents’ second quarter in office (1938 – present): 60 percent.
- For some context, here are the last 4 presidents’ May approval ratings during their first year in office: Trump (39 pct), Obama (65 pct), Bush (55 pct) and Clinton (45 pct).
The real issue here, both as in regard to an infrastructure package and DC politics in general, is not so much about May 2021 as November 2022. History is clear on the fact that presidents with sub-60 percent approval ratings tend to see their party lose dozens of House seats in midterm elections. Both parties know this math, and it deeply informs their thinking about how to either hold on to power (in the case of Democrats) or retake it (for Republicans).
Takeaway: we can see why so many DC insiders think June is an important month for getting an infrastructure spending bill closer to completion and also why only Democrats may back it. Infrastructure investment is a long lead time business, and every month wasted now means a longer wait to any eventual impact on employment and the US economy. Midterms are just 525 days away, so the clock is clearly ticking.
Gallup on presidential approval ratings and midterm elections: https://news.gallup.com/poll/242093/midterm-seat-loss-averages-unpopular-presidents.aspx