Despite the annual call to “sell in May and go away,” stocks pressed forward last month. The S&P 500 Index gained 2.3% while foreign stocks, as measured by the MSCI EAFE Index, rose 1.8%. Our main focus overseas, Europe, returned 1.1% in May. Even emerging markets, which have been suffering from poor performance since last year, joined the party with an increase of 3.5%. Our only meaningful emerging market exposure is within the Middle East, but it is worth a mention as it illustrates the degree of broad-based strength in stocks around the globe last month.
In last month’s letter, we mentioned a developing divergence in performance between cyclical and defensive sectors. We also have been watching a similar deviation over the last couple of months between large-caps and small-caps and value and growth stocks. We took notice of this pattern because a shift in momentum between risky and conservative stocks could be signaling a shift in investor risk tolerance…
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