The Markets – U.S. equities ended the month of May up a bit with a monthly gain of 1.16% setting at year-to-date gains of 7.73%.
Washington – The GOP legislative agenda appears to be stalled. Tax reform and other priorities have been replaced by damage control due to the firing of the FBI Director James Comey, and the alleged leaking of classified information to the Russians by Donald Trump.
The Economy –2017 is shaping up to be a decent year. GDP for the first quarter came in at a dismal 0.7% but the second quarter GDP is predicted to be 3.5% and the annualized GDP is predicted to come in at 2.1%. If Congress were to pass some sort of tax reform or get some sort of infrastructure spending program passed, those GDP numbers should improve further. Instead, for now the consumer is doing the heavy lifting. Additional factors underpinning the economy are helping; makers of oil & gas equipment, agriculture equipment, and warehouse construction are ramping up. The housing market continues to grow, even though there has been a slight uptick in financing rates (more about rates in a moment).
Headlines- We’ve mentioned that we still remain very concerned about North Korea and Syria. The WannaCry hack is the most notable Ransomware attacks in recent memory. Security researchers at Symantec and Google reported that traces of computer code in the WannCry ransomware is similar, and in some cases identical, to hacking events linked to the Lazarus Group. The Lazarus Group, from North Korea, is responsible for Ransomware hacks of Sony Pictures Entertainment, a cyber heist of Bangladesh’s central bank, and multiple assaults on Polish Banks. One motivation for the attacks is to raise funds for North Korea, a regime that is cash strapped.
If you want to learn more about cyber security, ransomware, and tips on how to protect yourself see our recent WCM Blog https://wsmtexas.com/think-innovatively/
Don’t be surprised if the Trump administration works to reduce the influence of various intelligence agencies. According to Kiplinger’s, Trump isn’t the first president to take a skeptical view of intelligence agencies efforts. Both Ronald Reagan and Bill Clinton questioned the value of daily intel reports. They, among other presidents, have treated the CIA director and FBI director as political appointees and not civil servants. One sure sign that these positions have been politicized is the constant leaks of information to the press.
More about the rates & the markets: the bond market not as optimistic as equity markets
The 2-Year Treasury yield rose slightly on March 28, 2017, after the Republican Party’s failure to replace The Affordable Care Act. However, the 10-Year yield curve moved slightly downward this month from 2.33% as of May 1 to 2.21% on May 31. Since the beginning of March, the difference in yields between the 2-Year and 10-Year Treasury rates has fallen from 1.17% to 0.93% as of May 31, 2017.
A lower or flatter yield curve usually indicates that the bond market is less optimistic about the economy. A higher interest rate environment usually affects future inflation and economic growth expectations. Higher interest rates are expected to restrict inflation and reduce the general demand in the economy. Markets expect the Fed to gradually increase the interest rate to keep inflation within its target range.
The spread between the yields on corporate bonds (HYG) and comparable maturity Treasury securities (IEF) has also narrowed, indicating overvaluation in high yield bonds. A narrow spread is usually not good for a high yield market as it indicates elevated prices for high yield bonds. Investors should be cautious when investing in the bubble of the high yield bond market. All this indicates caution in equity markets is prudent. There is a high correlation between equities and the high yield bond market.
Book recommendation: The Leader in Me by Stephen R. Covey.
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