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Despite a Dismal May, Domestic Equities Continue to Shine as the Top-Ranked Broad Asset Class


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April showers may indeed bring May flowers, however, things were less-than-rosy for the domestic equity market in the month of May. Driven by worries over escalating trade tensions, each of the major US indices posted relatively sizeable losses for the month, with the S&P 500 (SPX) down 5.87%, the Dow losing 6.11%, and the Nasdaq Composite dropping 7.41%, on a price return basis. Interestingly enough, May produced the first 5% pullback of the year.

Over the past 91 years, the S&P 500 Index has experienced a pullback of 5% or more 308 times, which means that, on average, the market experiences a little over three 5% pullbacks per year. In 2018, we saw a total of five such pullbacks, three of those coming in the last three months of the year. Each year, since the end of 2009, we have seen at least one 5% pullback in the market, with the exception of 2017, while 2011 experienced eight such occurrences.

One of the bigger questions, though, might be how much more downside have we historically seen following a 5% pullback. Well, the average this decade is about -2.75%. In other words, once the 5% mark is hit, we have seen less than 3% further downside, on average. There were two events which saw another 10+% downside following a 5% pullback this decade, and they occurred in 2011 and 2018. Excluding those two events, the average is even lower at -2.14%. Based on the closing price of the S&P 500, we hit a 5% pullback on May 29 th , and saw a little over 1% of additional downside, so from a historical perspective, based on this decade, it has been a "normal" market pullback.

So far in the 2010s, the market has seen a 5% pullback 27 times, or 2.7 times on average each year. This is lower than the overall average of 3.3 per year and much lower than the average of the previous decade of 4.7 per year as the 2000s experienced a total of 47 such moves.

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The S&P 500 closed on June 3 rd at 2,744.45, after hitting an intraday low of 2,728.81, and has since rallied more than 5%. As a result, the S&P 500 Point & Figure trend chart has returned to a buy signal, while maintaining an overall positive trend throughout the pullback.

While the market was pulling back in May there was a tailwind for bondholders, as investors sought the safety of US Treasuries, driving down yields and boosting bond prices. The iShares US Core Bond ETF [AGG] was up 1.85% during the month, reaching its highest level since September 2017. Falling intermediate term yields caused inversion in the closely-watched three-month and 10-year US Treasury yields. The 10-year yield falling below the three-month has preceded the last several US recessions. However, this has only occurred when the yields have remained inverted for a sustained period and even then, we have typically been more than a year from the onset of a recession.

Within our Dynamic Asset Level Investing (DALI) tool, domestic equities continues to rank number one from a broad asset class perspective, followed by international equities. We did see a shakeup further down in the rankings, however, as fixed income moved ahead of commodities for the first time since January 2018. From an equity sector perspective, we continue to see leadership from technology, industrials, and utilities; while growth remains the dominant style across all three domestic size boxes.

ADDITIONAL RESOURCES

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

Dorsey Wright's relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset, or strategy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.




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