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Financial markets continued to rally in May, driven by widespread investor optimism. Massive government stimulus measures around the world are providing much-needed economic support, and the gradual reopening of the global economy has begun as the virus case curve has started to flatten. Potential COVID-19 treatment options are emerging, and a coronavirus vaccine could be available before the end of the year.

However, while spending to protect businesses and households was necessary to protect the economy from financial ruin, we will be dealing with the consequences of record borrowing for years to come. The US government has two broad strategies it can adopt to try to reduce its debt burden, neither of which is cost-free. We examine each of these strategies in this month’s issue, along with a review of the performance of major asset classes in May and our current tactical asset allocation positions.

Key Takeaways

  • Global Equities: Although both European and Japanese stocks performed well (both up 5.9%), US equities (4.8%) outpaced developed market (4.1%) and emerging market (0.6%) indices. For the month, US equities also handily outpaced other major assets classes. However, on a year-to-date basis, domestic stocks (-5.0%) have underperformed most asset classes except non-US equities.
  • Fixed Income: Treasury rates were largely flat across most of the yield curve. The 10-Year US Treasury ended the month with a yield of 0.65%, up 0.03% from April. The credit market rallied alongside other risk assets and delivered strong returns. The high-yield market was helped by a combination of the energy market recovery and record retail inflows.
  • Tactical Allocation: We have changed our recommendation to a modest underweight to equities and are also shifting away from international markets in favor of the US. We are maintaining our neutral recommendation to fixed income and prefer investment-grade corporate and municipal bonds. We continue to recommend that alternatives can provide worthwhile diversification benefits for the right client. And we favor holding higher-than-average cash balances to enable investors to deploy capital as opportunities arise.