June 2017

Financial Market Roundup

Produced by Fifth Third's Investment Management Group

Trends at a Glance

Global Trends

Central Bank Policy

Equity Performance

Interest Rates and Growth

Political and Regulatory Trends

Investment Trends

In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of May. I hope you find this Financial Market Roundup helpful and informative.

Global Trends

Moody’s Investors Service (bond credit rating Company) unveiled a surprise downgrade of China’s sovereign credit rating (first rating cut since 1989) in May, citing concerns about its continued buildup of debt. The downgrade is yet another sign of challenges faced by China, however, few analysts expect painful reforms to be unleashed ahead of the Communist Party’s leadership reshuffle due later this year.

Central Bank Policy

Investors are giving more thought to the implications of the Fed moving to phase out reinvestment and gradually shrink its $4.5 trillion balance sheet as securities mature. Their decision will likely be announced in December with a lot of focus being paid to which securities will be permitted to roll-off first. The market’s initial reaction shouldn’t be too volatile but it could restrict the Fed’s ability to raise short-term interest rates in 2018 and beyond.

Equity Performance

Earnings at U.S. companies accelerated at the fastest pace in nearly six years in the first quarter, extending the bull market into its ninth year. Stocks continue to rally even in the face of a daily flow of negative political headlines, here at home and abroad. The S&P 500 finished the month of May up over 1 percent (up over 8 percent year-to-date), making new all-time highs.

Interest Rates and Growth

Interest rates (10-year Treasury) moved lower for a fourth consecutive month in May even as investors prepare themselves for the third rate hike by the Fed in the last seven months. The yield on the 10-year Treasury fell 8 basis points, finishing the month at 2.20 percent. U.S. real GDP was revised up slightly in the first quarter, rising at a 1.2 percent annual rate versus the 0.7 percent initially reported.

Political and Regulatory Trends

President Trump’s budget proposal, released in the final week of March, claims to balance the budget within ten years, relying on the administration’s proposed tax plan. The proposal includes $3.6 trillion in spending cuts over the next decade. The President’s proposed budget assumes that interest rates will normalize (higher interest expense) and the Fed will wind-down its balance sheet (lower excess earnings).

Investment Trends

Equity investors have been waiting all year for a significant downturn but have yet to see one. The largest pull-back so far in 2017 was less than 3 percent, and it took about 6 weeks to play out (early March through mid-April). If the current “Goldilocks” environment continues to persist, one of moderate growth and low inflation, investors waiting for the next dip might be waiting a long time to put their money to work.

Market commentary provided by Fifth Third Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 5/1/17 through 5/31/17. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account.

Investing involves risk, including the possible loss of principal invested. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Past performance is no guarantee of future results.

Indexes are unmanaged, do not incur investment management fees, do not represent the performance of any particular investment, and may not be invested directly into by investors. Small company investing involves specific risks not necessarily encountered in large company investing such as increased volatility. Investments in foreign markets entail special risks such as currency, political, economic and market risks.

Consumer Price Index (CPI) - measures changes in the price level of a market basket of consumer goods and services purchased by households.

DJIA/DOW – the Dow Jones Industrial Average is a price weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

Fed – The Federal Reserve System (FRS) is the central bank of the United States and is commonly known as “The Fed”. It regulates the U.S. monetary and financial system. The Fed's mandate is to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates.

Federal Funds Rate (Fed Funds) – The interest rate at which depository institutions actively trade balances held at the Federal Reserve.

FOMC – The Federal Open Market Committee is the policy-making branch of the Federal Reserve that reviews economic and financial conditions and determines an appropriate stance of monetary policy by setting a target for the federal funds rate. GDP – Gross domestic product is the market value of the goods and services produced by labor and property located in the United States.

GDP – Gross domestic product is the market value of the goods and services produced by labor and property located in the United States.

Gold Index - is the U.S. dollar per Troy ounce.

MSCI EMF (Emerging Markets Free) Index – is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006 the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

MSCI US REIT Index – is a free float- adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe.

MSCI World Index – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,Sweden, Switzerland, the United Kingdom, and the United States.

Oil ($ barrel)/WTI – Bloomberg USCRWTIC Index representing West Texas Intermediate (WTI) Cushing Crude Oil Spot Price.

Organization of Petroleum Exporting Countries (OPEC) - is a group consisting of 12 of the world's major oil-exporting nations. OPEC aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.

S&P 500 Index – The Standard and Poor’s 500 index is a capitalization weighted index of 500 benchmark stocks and is often used as a measure of the overall U.S. stock market.

US Treasury – A debt obligation backed by the U.S. government with a fixed interest rate and a maturity between one and 10 years.

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