And We’re Back – Foy Financial Services, Inc.

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

At least the large cap sector is back.Large cap equities have once again led the charge back to ‘even’ with another spectacular V-shaped rally. The recovery rally in May has actually been quite uniform across capitalization weightings, just as the second wave of selling in April was uniform. The S&P 500 Index is up +5.87% MTD and is now up +0.86% YTD. The S&P 400 MidCap Index is up +5.48% MTD and down -3.18% YTD, while the S&P 600 Small Cap Index is up 5.39% MTD and down -8.24% YTD. Mid cap and small cap equities are lagging year-to-date because they hadn’t fully recovered from the first selling wave in March.

Similar stories have developed in the S&P equity sector indexes in May. Sectors that have regained their leadership positions year-to-date include the S&P Composite Financials Index, +3.80% MTD and +4.31% YTD, the S&P Composite Industrials Index, +8.57% MTD and +4.31% YTD, and the S&P Telecommunication Services Index, +9.36% MTD and +3.25% YTD. Technology sectors took the hardest hits during the severe correction and, while they have had dramatic rallies, many remain in negative territory year-to-date. These include the S&P Semiconductors Index, +17.78% MTD and -8.33% YTD, the S&P Composite Information Technology Index, +10.65% MTD and -1.97% YTD, and the S&P Software & Services Index, +10.30% MTD and -4.80% YTD. Finally, we have the only two S&P sectors that are down for the month, and that also happen to be down for the year, the S&P Composite Health Care Index, -6.10% MTD and down -4.46% YTD, and the S&P Pharmaceuticals Index, down -3.00% MTD and -6.74% YTD.

The severe correction in domestic equities has pushed international equities into the spotlight. European equity markets have taken the leadership position in spite of an impressive list of ongoing fragile situations. The MSCI Europe Index has rallied +4.07% thus far in May and is up an impressive +20.00% year-to-date. This is after years of tagging along slower and lower behind U.S. markets, regardless of the direction. The MSCI EAFE Index is +3.83% MTD and +16.04% YTD. The MSCI Emerging Markets Index is +4.82% MTD and +9.31% YTD. These market sectors are squarely in the middle of the trade tariff negotiations, which have undoubtedly increased scrutiny, but their primary moves higher were well established before negotiations even started.

Bond markets remain stuck in their own sandpit. Bond markets have traditionally been ‘look-back’ types of markets as opposed to equity markets that ‘look-forward.’ In the same vein, the Federal Reserve Board has traditionally been ‘looking back’ at recent credit market activity to determine short-term interest rates. Their current focus also includes assessing data such as inflation rates and national employment levels, which also have forward looking aspects. Thus far in May the Bloomberg U.S. Aggregate Bond Index is -1.25%, while +1.90% YTD. The Bloomberg Municipal Bond Index is +0.03% MTD and -1.00% YTD. The Bloomberg U.S. Corporate High Yield Index is +1.50% MTD and +2.50% YTD.

Highly volatile markets create opportunities for advanced portfolio management techniques.These include tax loss harvesting, basis adjustment, performance attribution and sector rotation assessments. This is when the ‘art of investing’ comes to bear, providing guidance and proven techniques during sometimes confusing times. One of the most important techniques might seem counter intuitive. When markets tumble, it may seem like a good time to seek out new market opinions. Volatile markets seem to spring crazy investing ideas out of the woodwork. During these times it is more important than ever to filter your information and trust the process that brought you this far. Cool, calm, and collected wins the race in this business.

Edward D. Foy, Manager, SELECTOR^® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.