Month of May Sees an Increase in Market Dispersion

The month of May ended last Thursday, and it was a positive month for all four of the main U.S. indices, but there were considerable differences in the performance of the Nasdaq and Russell 2000 compared to the Dow and the S&P 500. For the month, the Russell gained 5.95% and the Nasdaq gained 5.32%. The Dow only managed a gain of 1.05% and the S&P tacked on 2.16%.

One of the more prominent themes and concerns for investors during May was the ongoing trade war between the U.S. and what seems to be the rest of the world. When talks went well, stocks moved higher. When new tariffs were announced, stocks moved lower. But that theme could also explain the disparity in the performance of the four main indices.

The Dow and S&P are made up of large-cap companies and are more likely to have a greater percentage of foreign sales. The Russell 2000 is made of small-cap companies that are far less likely to rely on foreign sales for their current revenues. As a result, the impact of retaliatory tariffs from foreign governments has less of an impact on Russell 2000 components.

Turning our attention to the sectors, we see that the tech sector was far and away the best performing sector with a gain of 6.78%. In all, six sectors moved higher while four moved lower. On the down side, the consumer staples sector lost 1.57% and the telecom sector lost 1.53%.

The poor performance from consumer staples names can also be attributed to the trade war. A number of these companies garner a high percentage of revenue from foreign sales. While that argument worked in the case of consumer staples, the other sector that stands to lose if the trade war continues is the industrial sector. What is odd about May’s sector performance is that the industrial sector was the second best performing group.

The big disparity in the performances of the indices and the sectors led me to look at the dispersion of returns for May, as well as volatility and correlation. What I found was a little surprising. Dispersion was higher and the correlation was lower, but I was surprised to see volatility lower.

What does this mean for you and your investments? Investors still seem to be bullish on the overall market, but not all sectors and companies. The differences in performance suggest that you have to be selective about the companies and the sectors you choose to invest in. If the trade war continues and if it escalates, all bets are off. I wrote last week that the game President Trump is playing is a dangerous one and could send the U.S. economy into a recession.

I would look for the uncertainty to continue in June with volatility possibly increasing as the trade negotiations continue. I would keep an eye on the sentiment indicators and the economic reports to make sure the economy and market are still on the same path. Hopefully, the trade issues will get resolved and that won’t be the issue that ends the bull market.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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