May ended up being a tale of two halves as the first half of the month saw the market behave very differently from the second half. The S&P 500 was positive by 4.96% for the month but most of that performance came in the first half of the month as the index was up almost 6% on May 15th. The second half of the month was a bit choppier as the large cap index retreated from its highs. Mid and Small Caps followed a similar path to their Large Cap counterparts with strong starts to the month followed by a pullback in the second half of the month. The S&P 400 Mid Cap Index finished the month positive 4.39% while the S&P 600 Small Cap Index finished the month positive 5.04%. There was a big disparity between growth and value as the S&P 500 growth index finished the month positive by 6.6% and the S&P 500 Value Index ended up by just 2.97%. The tech heavy Nasdaq outperformed the S&P 500 and finished May up by 6.98%.
Interest rates were one of the main drivers of the market in May. The 10-year treasury rate started the month at 4.63% and fell to 4.36% by May 15th. This sent both stock and bond prices higher. The US Bloomberg Aggregate Bond Index was up 2.41% by the 15th of the month. But from the 15th to the end of the month interest rates rose as the 10-year treasury climbed back over 4.5% sending stocks and bonds lower. The Bond Index finished the month up by 1.7%.
International stocks followed the same pattern as US stocks as the MSCI EAFE International Developed Index finished the month up 4% after rising during the first half of the month and then giving back some of those gains to finish May. The MSCI Emerging Markets also followed suit but was hit even harder during the second half of the month at one point up 4.81% but finished the month just barely positive at 0.59%.
When looking at the S&P sector performance, technology led the way up over 10% in May. Utilities also continued their recent run and were up 8.97% for the month. Communication services was up for 6.5% and Real Estate was positive by 5.08%. Energy was the only negative S&P sector in May, down 39 basis points. Consumer Discretionary was just slightly positive at 0.30% for the month. For the year, Communication Services is the top performing sector returning 20.88% followed by Technology at 17.31% and Utilities at 15.82%. Real Estate remains the only negative sector year-to-date, down 4.38%.
As already mentioned, the movement in interest rates throughout the month was a huge driver of both the stock and bond markets. Bond yields are continuing to adjust to stubborn inflation numbers and Federal Reserve rate cut expectations. Inflation remains higher than the Fed target and there is no real confidence that we will see a meaningful decline in the short term. While the Federal Reserve’s preferred inflation measure, Core PCE, hit 2.75% (it’s lowest reading since March of 2021), it has not come down as quickly as many had expected this year. Meanwhile, CPI, the inflation reading many consumers follow, remains above 3.3% and we have not seen a meaningful decline since June of last year. We heard from many Federal Reserve officials during the month, and they all echoed expectations of keeping interest rates higher for longer in order to bring inflation down.
The question remains, how long can the economy hold up and avoid a recession in this interest rate environment? The labor market continues to be strong. Initial unemployment claims have ticked up slightly, but the unemployment rate remains under 4%. Economic growth may be somewhat slowing as revised Q1 GDP is now at 1.3% but continues to avoid recession territory. The higher move in rates has pushed mortgage rates back above 7% in May and pending homes sales for April fell 7.66% month over month to their slowest pace since the beginning of the pandemic, April of 2020. Higher rates have also had an impact on the US National Debt and interest payments on that debt. The interest payments on the US National Debt are now more than $1 trillion dollars per year and make up a larger percent of the Federal Government’s budget than Defense, Medicare, and Medicaid.
The consumer continues to be resilient but more and more corporate executives are pointing towards consumers being more discerning on purchases and looking for value. The S&P Consumer Discretionary sector was one of the worst performing sectors up only 0.3% in May. This is also being seen as consumer discretionary companies are reporting earnings and announcing new initiatives to attract customers. For example, Lululemon, a more high-end apparel retailer was down 13% in May and Kohl’s fell 25% in one day. Fast food restaurants are announcing new value meals and price cuts to entice customers to return. Target and Aldi have also announced price reductions on certain items. Wal-Mart is coming out with an organic line of grocery products to attract higher end grocery customers. Consumer habits may be changing after years of inflation, and this will continue to force retailers to change with them.
Looking ahead, the CME Fed Watch Tool is now predicting only 1 rate cut for the remainder of the year when expectations were 6-7 rate cuts coming into the year. Yet stocks remain positive year-to-date, especially large cap growth and technology stocks.
And this is all occurring with the backdrop of an upcoming presidential election where one of the major candidates was convicted of 34 felonies this month. So far, this news hasn’t moved the markets as investors remain fixated on inflation, interest rates, and the Fed’s response. This is once again a reminder to build a diversified portfolio that matches your long-term needs and goals rather than to base your investment decisions on the latest headlines.
-thumb-1.jpeg?t=1717696496346&width=560&composeType=play_button&overlayColor=%23e09b2d&overlayScale=0.3&name=Logan_Deyo_Wealthspire%20Investor%20Insights%20(June)-thumb-1.jpeg)
