There is an investment adage: “Sell in May and go away” to suggest that investors are better off being out of the market than in during most months of May. This year was no different in the risk markets as the very strong returns from April in risk markets in part reversed. It started with commodity markets which had run up substantially in April, most pronounced was silver’s April gain of +28%. The first week in May saw silver quickly give up all of April’s monstrous gains and though at first it led the way down, all other commodity markets followed with one day drops in oil prices of as much as -9%! The US dollar reversed what had been a steady depreciating trend gaining +5.2% vs. the euro before giving some of that back to end the month up +2.8% vs. the euro. European jitters came back to the market as uncertainties over how an imminent Greek debt restructuring would occur and what repercussions would result plagued the market. Greek debt yields climbed over 16% in the 10 year sector and well over 20% in the 2 year sector indicative of a near-term default or “re-profiling” as some bureaucrats were apt to call it. The US economy showed signs of slowing down with significantly weaker than expected numbers in retail sales, consumer confidence, durable goods orders, and existing home sales. US Equity markets dropped with the falling commodity prices, strengthening US dollar, anxieties over Europe, and signs of a weakening domestic economy. Much of the equity market losses were regained in the last four days of trading and the markets finished the month down only modestly with the S&P 500 down -1.1%, the Dow Jones Industrial Average down -1.5%, and the Russell 2000 small cap equity index down -1.9%. The bond market benefited from the market risk aversion and the Barclays Aggregate Bond Index finished the month up +1.3%, its best monthly performance since June 2010, as 10 year Treasury yields dropped from 3.30% at the beginning of the month to 3.04% by month end.
Amidst this economic and market backdrop the Limited Risk Portfolio was down -1.36% in May. Hurt primarily by its modest allocation to the commodity sector, performance was balanced by exposure to the high yield bond market and the addition mid-month of a basket of high quality, high dividend yielding stocks such as T, PM, PFE, and JNJ. With 10 year Treasury yields approaching sub 3.0% levels, the outlook for high quality, high dividend yielding stocks looks rosier than that for US Treasuries in all but the “double dip” recession economic scenario and it would appear that the US is still on track to produce GDP growth for the year in the range of 2.5% to 3.0%. Therefore, in addition to increasing exposure to high dividend yielding equities, exposure to the high yield bond market was reduced during the month of May in anticipation of higher interest rates to come and a potential widening of credit spreads.
The Bond Portfolio counterbalanced drops in the risk markets and was up +0.62%. In anticipation of higher future bond yields, a very high cash balance was maintained throughout the month in the bond portfolio and no exposure was taken to the long-term sector of the interest rate yield curve. This defensive stance was a drag on performance relative to aggregate bond market benchmarks, but under the current economic outlook, this manager believes this defensive posture is currently warranted.
As markets look to June for direction, it is expected that price action will be most greatly affected by the perceived repercussions and contagion effects of an imminent Greek default, the domestic US economic data and signs for growth directions, and the necessity for a near-term agreement by Congress to raise the debt ceiling together with the potential for compromise on projected deficit reduction.
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