May was a good month here in the U.S., with markets up pretty much across the board. Elsewhere in the world, not so much, with both developed and emerging markets down for the month. But this difference was less about economics and more about politics.
U.S. markets. In the U.S., the economy slowed down in the first quarter, but it kept growing. The data in April, and even more so in May, suggests that growth is picking up again. Job growth is strong, and wage growth continues to improve. Businesses are investing again. In short, consumers and business remain confident and are both willing and able to spend.
The government is also helping. The tax cuts and increased spending are pushing more demand into the economy. Corporate earnings are also doing really well, growing at the highest level since 2010, due primarily to the effects of the tax cuts. That said, revenues are also growing, supported by the strong economy. Big picture? Things are very good, for both the economy and companies. Small wonder the markets are doing well.
Global markets. Elsewhere in the world, the economic news isn’t as good. In Europe, for example, while growth continues, it is clearly slowing. We don’t see the kind of acceleration we have here in the U.S. In emerging markets, economic stress is rising as a stronger U.S. dollar pressures companies and countries that have borrowed in that currency. There has been turmoil in several high-profile countries (e.g., Argentina, Turkey, and Brazil), which have historically been canaries in the coal mine. This, too, has rattled markets. Again, small wonder that markets outside the U.S. have pulled back.
Politics. Moving on to politics, we see a similar pattern to that of the markets. In the U.S., politics makes the headlines but so far hasn’t really affected the markets here. Abroad, though, U.S. actions on trade—most notably the decision at month’s end to impose tariffs on close allies—has rattled markets there. In Europe, Italian politics has become a major issue as the incoming Italian government has been perceived as a potential threat to the eurozone and, potentially, even the European Union. In Asia, the on-again/off-again summit with North Korea has also raised and dashed hopes, rattling markets throughout the region.
More of the same. Looking forward into June, we can expect these themes to continue. Here in the U.S., stronger economic growth should keep financial markets healthy, while politics is unlikely to get much worse than it is at the moment—suggesting another good month is quite possible. Abroad, trade will continue as a worry for all countries, and the continued strength of the dollar will remain as a headwind that should keep emerging markets under stress. In developed markets, however, with the Italian government apparently resolved, the politics headwind may fade. This could leave the markets in a better place.
Interest rates. The other major factor in June will be the Fed’s regular meeting, where markets expect an interest rate increase. With the U.S. economy improving, such an increase is certainly likely. But one of the side effects of rising political risk abroad has been to keep longer-term rates low, which should mitigate the effects here in the U.S. The primary result will be to both ratify the Fed’s view of a healthy U.S. economy and to put more support under the dollar’s value—which could increase the headwinds on emerging markets.
Overall, May was a good month for U.S. investors, and June is looking positive as well. The situation abroad is less clear, as politics and slowing growth are starting to turn expectations negative. It is likely that June will look quite similar to May. As a U.S. investor, this is not a bad place to be.