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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.

The major central banks of the world have been easing their monetary policies appreciably since the financial crisis of 2008. The Federal Reserve led the charge; we are now well into the seventh year of the Fed’s NZIRP, or near-zero interest rate policy. We have no doubt economists will debate the merits of this monetary strategy for years to come, and only time will tell whether it was the correct course of action. However, few can deny the effects of extreme accommodation on U.S. markets today. Now that rate normalization appears to be imminent, we thought this would be a good time to take account of market reactions to the Fed’s easy-money posture thus far.

Let’s take a look at the May numbers first:

  1. The MSCI World Index, a broad measure of developed world’s stock markets, rose 0.34 percent for the month.
  2. The S&P 500, a measure of large U.S. companies, rose 1.29 percent for the month.
  3. The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, declined 3.99 percent for the month.
  4. The MSCI REIT Index declined 0.25 percent for the month.
  5. Gold rose 0.52 percent for the month.

In late 2007, just before the apex of the crisis, the Fed lowered interest rates as its first line of defense. Over the next 16 months, the central bank cut its policy rate by 500 basis points. When that wasn’t enough, it then undertook (over a period of six years) three waves of quantitative easing and one shot at “Operation Twist” for good measure. During that time, the yield on the 10-year Treasury fell approximately 235 basis points.

As intended, the drop in interest rates had a profound effect on various sectors of the economy, not just the bond market. Bond investors enjoyed big gains as rates raced to the bottom. But equity investors were rewarded handsomely as well. Since bottoming out in early 2009, the S&P 500 has doubled in value twice. For investors, historically low fixed income yields (a symptom of policy accommodation) made owning equities much more attractive on a comparative basis. At the same time, low rates of financing provided companies with an incentive to borrow lots of money to buy back their own shares. This sent capital flowing into stocks, and the market soared.

Other assets, like housing, also benefited. Extremely low rates allowed investors to raise money to buy up distressed properties around the country. As a result, home prices have rebounded significantly over the past few years. This was a godsend for those who saw their mortgages sink “under water” during the housing crisis, but this has also reduced affordability for first-time home buyers.

Some benefits of low cost borrowing may prove fleeting. The federal debt outstanding has nearly doubled since 2007, enabled by the historically low financing rates essentially handed to them by the Federal Reserve. Despite this massive increase in debt, interest expense paid by the U.S. government is essentially the same today as it was back in 2002. When rates eventually rise, this amount of borrowing (and spending) will prove more challenging.

So who lost out when rates were pushed lower? Savers. Savers have been forced to save more and spend less. Perhaps the most troublesome aspect of the Fed’s six-year stretch of policy accommodation is the possibility that it has fostered a lackluster pace of economic recovery. It is true that many have recouped the losses they incurred during the financial crisis through asset price appreciation, but there are still many Americans at the lower end of the income spectrum (who don’t have a stock and bond portfolio or own a home) who have not participated in the wealth creation provided by lower rates.

 
 
     
 

Market commentary provided by Fifth Third Private Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 5/1/15 through 5/29/15. 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.

S&P 500 Index is a composite of 500 companies, amongst the largest based in the United States, and it often used as a measure of the overall U.S. stock market.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The MSCI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. With 137 constituents, it represents about 99% of the US REIT universe and all securities are classified in the REIT sector according to the Global Industry Classification Standard (GICS®).

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

The 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 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.


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