Bond, Stock Rally Shows Need to Be Prepared (to Be Wrong)Michael P. Regan
During the first two World Wars, Boy Scouts sold U.S. bonds to help finance the fighting. If they were still at it today, there’d be a lot of merit badges to pass out globally after every bond market in the world rose in May.
The Scouts never were called upon to sell stocks, and they certainly weren’t needed this month as the MSCI All-Country World Index jumped almost 2 percent and the value of the planet’s equities reached a record $64 trillion. Emerging markets led the gains in stocks as benchmark indexes in India, Russia, Hungary and Argentina jumped at least 8 percent.
The Scout motto, of course, is “always be prepared.” So as the final sand of the market’s month slips through the hour glass, it’s a good time to reflect on how some investors and pundits were well prepared for all the wrong things in May.
In the Treasury market, conventional wisdom was to expect higher yields by now as we bid adieu to quantitative easing. (Or if you prefer the parlance of Internet commenters: bid adieu to imaginary Monopoly money printed by central banksters to puff up prices and make us so complacent we won’t notice when they come to grab our guns. Wake up, sheeple!)
A Bloomberg survey of analysts in February called for the 10-year Treasury rate to jump this quarter to 3.15 percent, which would’ve been the highest since 2011. Instead, the yield fell steadily through May and touched an almost one-year low of 2.40 percent. Sovereign rates reached record lows in Spain and Italy amid speculation European central banksters would puff up prices with imaginary euros so no one notices when they come to grab their Vespas and Nebbiolo.
All 26 bond markets from Hungary to Japan tracked by Bloomberg and the European Federation of Financial Analysts Societies gained during the month.
In the stock market, anyone following the conventional “sell in May” cliche would have been better off selling their cliche book instead. Nineteen of 24 developed markets gained in the month, with Norway, Finland and Hong Kong leading the charge with gains of more than 4 percent. The S&P 500 jumped almost 2 percent in the month and was poised to close at or near a record.
Russia’s Micex Index rallied almost 10 percent in May for its biggest gain since 2011 and the ruble strengthened 2.3 percent versus the dollar amid easing concern about tensions with Ukraine. The MSCI Emerging Markets Index surged 3.4 percent in the month for its biggest gain since October.
Anyone who told you to “expect more volatility this month” was a) probably selling some sort of volatility-based derivative, and b) wrong. The Chicago Board Options Exchange Volatility Index fell for a fourth straight month and flirted with a seven-year low. The Bank of America Merrill Lynch Move Index measuring volatility in Treasuries was poised for a fourth monthly loss of the year. The JPMorgan Global FX Volatility Index reached the lowest since June 2007 during the month.
In currencies, the Bloomberg Dollar Spot Index rose 0.3 percent in May after a three-month slump. The Mexican peso, South Korean won and Canadian dollar rallied at least 0.9 percent versus the greenback, while Europe’s money took a beating with the Swedish krona, euro, Danish krone and Swiss franc each losing at least 0.7 percent.
Wheat stole the show in commodities, dropping 13 percent in May for its biggest loss since 2011 as weather reports turned favorable. Coffee, cotton and corn lost at least 8 percent and gold fell 2.9 percent while West Texas Intermediate crude oil and aluminum jumped more than 2 percent.
This weekend, remember the last line of the Scout oath: “To keep myself physically strong, mentally awake and morally straight.” June could certainly bring more volatility. Always be prepared.