May 2009

The stock market performed well in May, continuing the impressive advance from the low levels reached in early March. From that March nadir, the major indices have surged between 30-40%, including advances of roughly 3-6% in May. There are several factors that have buoyed equities, including 1) several ‘less bad' or ‘better than expected' economic indicators, 2) improvement in the corporate credit market, 3) expectations that the various government stimulus programs will provide economic support over coming months, and 4) the financial sector, primarily banks and insurance companies, seem to have avoided systemic collapse. While the economy remains stuck in a difficult recession, the equity market appears to sense that better days lie ahead. The Treasury bond market has not been so fortunate, as the ‘flight to quality' that propelled government bond returns in 2008 and early 2009, has reversed as investors feel more comfortable assuming risk. Year to date, the 30-year Treasury bond and 10-year Treasury note have declined by 25% and 9% respectively. Corporate and municipal bonds have performed significantly better than treasury issues, again reflecting thawing of the financial markets over the past seven weeks.