Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

Global equities and fixed income posted positive returns in May. US equities outperformed both international and emerging market equities. International equities outperformed emerging markets. Growth significantly outperformed value during the month. 

Investor sentiment improved during the month following the risk off market in April. Inflation continued to ease in developed markets, reducing fears of a higher for longer scenario. Notably, inflation in the US declined in line with market expectations after it surprised to the upside for three consecutive readings in 2024Q1. Nonfarm payrolls for April and Q1 GDP growth indicate that the US economy is slowing albeit it remains robust overall which raised investors’ hopes for softer growth that reduces inflation without triggering a recession. Yields fell across the curve in the US as this scenario rekindled hopes of at least some rate cuts later this year, which helped propel equities and fixed income higher. Solid corporate earnings were another tailwind.

Forward looking purchasing manager indicators continue to be in expansionary territory in developed markets, with the US composite PMI climbing to its highest level since April 2022. Europe and Japan also saw PMIs increase, albeit less than in the US, while the UK’s fell and came in below expectations. Within emerging markets, China and India PMIs continued to strengthen. China unveiled new measures aimed at stimulating growth in the struggling property sector, leading to solid equity returns in May. Overall, economic data continues to show a resilient global economy.

The Fed kept interest rates unchanged while the minutes from their May meeting suggested that the disinflation process could take longer than previously thought. With that said, US headline inflation eased to 3.4% while core inflation fell to 3.6%, both were in line with expectations and helped provide some support for risk assets. Elsewhere, inflation in developed markets continues to trend downward while the Bank of England left interest rates unchanged. Inflation in China rose in April and came in above expectations following last year’s deflationary period as the economy continues to recover.

Trade tensions between the US and China increased as the US raised tariffs on Chinese electric vehicles to 100% and implemented higher tariffs on Chinese semiconductors and solar cells. Additionally, the State Department of Commerce withdrew export licenses from major semiconductor companies, aimed at preventing supply to Chinese telecom company Huawei. A general election for July was called in the UK. The overall market impact from geopolitical events was muted.

The US dollar weakened against most major currencies. Global REITs underperformed broader equities. While still posting positive absolute returns in May, commodities underperformed broad equities as crude oil declined following strong performance earlier in the year. Gold continued to climb and hit new record highs during the month, supported by falling yields.

Global equity markets performed strongly during the first quarter. Even though the Federal Reserve shifted gears on rate cuts, equity markets focused on the AI narrative and a generally solid economy, which benefited US large growth stocks the most. Returns for small cap, value and non-US were more subdued, yet positive. Equity volatility remained low and declined during the quarter as equities had positive returns across the board.

Treasury yields rose sharply during the quarter as markets positioned for a slower pace in rate cuts than expected at the end of 2023. The 2-year Treasury yield rose by 40 bps from 4.2% to 4.6% during Q1, while the 30-year Treasury yield also rose by 30 bps from 4.0% to 4.3%. Credit spreads declined during this risk-on quarter.

Global equity markets experienced a decline in the quarter, primarily due to an increase in longer-term rates as markets anticipated a prolonged period of higher rates. Volatility remained low for most of the quarter but rose in the final weeks alongside the spike in rates.