Monthly Market Commentary

These monthly market commentaries share a synopsis of the U.S. financial markets with intelligent insights.

May Investment and Economic Commentary

Coming off their worst combined month of the year in April, the equity and bond markets both rallied in May.  They were boosted by strong earnings growth and enough soft news on inflation to take a potential rate increase off the table while leaving at least one rate cut in 2024 still in the mix.  The pessimism after April’s poor returns gradually shifted towards modest optimism in an increasingly data focused market environment.  Though the US economy remains resilient and more positive economic signs flashed across many developed markets including Europe, investors focused on possible indications that the economy and inflation were softening enough to put the Fed back on track for at least one rate cut in 2024.  While it is likely that any rate cuts are still a few months out, many investors may be thinking the strong May markets put everything back on track.

Here are a few observations about what occurred across the public markets during the month.

Overall

• The S&P 500 Index was up 5.0% in May.  The YTD return rose to 11.3% and the one-year return was 28.2%.
• The MSCI EAFE Index was up 3.9% in May.  The YTD return was 7.1% and the one-year return was 18.5%.
• The Bloomberg Aggregate Bond Index was up 1.7% in May.  The YTD return was -1.64% and the one-year return was 1.3%.

Domestic Equity

• Equity markets bounced back in May, largely because Nvidia surged after releasing a blockbuster earnings report that exceeded analysts' estimates. Additionally, on the last day of trading, the Dow Jones Industrial Average jumped for its best session of the year after the Fed’s preferred inflation measure came in around expectations.
• Growth has outperformed value in 2024 and May was no different. Large cap growth led the way as the technology-heavy Nasdaq climbed 6.9% for its biggest monthly gain since November.  Value stocks did participate in the rally, benefiting from the rise in utilities and real estate. 

International and Global Equities

• Foreign developed stocks posted positive returns across all countries with Norway generating the best monthly return at 8.8%. Value continues to outperform growth in many regions.
• Emerging markets eked out a positive return in May because of China’s 2.4% gain. Investors are still cautious on China after economic data in the last week of May showed the economy is still struggling. 

Fixed Income Markets

• The bond market bounced back and posted positive returns across the board as inflation measures aligned with expectations, increasing the chances of rate cuts later in the year. Markets are highly sensitive to each data point as the Fed has indicated that the timing of rate cuts will depend on multiple economic indicators.

Specialty Markets

• In the commodity market, gold and silver surged and other metals like nickel and copper continued their upward trend. REITs had their best return in 2024. 

US Equity Sectors

• Performance across sectors was broadly positive with Information Technology and Utilities leading the way. Energy was the sole sector that declined.

Dear Valued Investors,

April showers brought May flowers as markets placed greater importance on economic growth and corporate profits than the “higher for longer” interest rate messages from the Federal Reserve (Fed). In fact, the S&P 500 ended May above where it ended March. So, as you prepare for summer vacations, how much should you worry about your stock portfolios?

First, based on history, stocks tend to do just fine between Memorial Day and Labor Day, with the S&P 500 rising 1.8% on average between holidays with gains 70% of the time (source: Bespoke). Also consider stocks tend to do better the rest of the year when they rise in May, with an average June–December gain of 5.4% with positive returns 73% of the time. Seasonality is not particularly worrisome.

Investing involves much more than seasonality. Looking at the U.S. economy, slower growth in the first quarter of about 1.3% is expected to be followed by a slight pickup in the second quarter. Consumer spending did slow in April as inflation remains elevated and may slow further now that excess savings from the pandemic have generally been spent. However, business investment — particularly in artificial intelligence — is helping pick up the slack. The Fed’s preferred inflation measure held steady in April at 2.8% annually but is likely to come down further over the balance of the year as the economy slows and higher interest rates continue to impact big-ticket purchases.

Corporate America has done its part in keeping the stock market well-supported, even underneath elevated valuations. Earnings for S&P 500 companies in aggregate grew about 10% during the first quarter, excluding losses incurred by a Bristol Myers Squibb acquisition. Guidance was mostly upbeat. Some retailers, such as Walmart and Target, even announced price cuts, helping fight inflation.

Political uncertainty has ratcheted higher following former President Donald Trump’s conviction. The potential market impact of the election is extremely difficult to predict, but we do know the differentiation between Trump and President Biden is widest in foreign policy, immigration, regulation, taxes, and trade, so stocks tied to those issues could see big swings. We also know from history that volatility tends to pick up in the early fall before rallying after the results, and that the economy is usually the deciding factor, so watch inflation, employment, and consumer confidence closely.

We continue to follow global headlines. The possibility of China’s military aggression toward Taiwan remains perhaps the biggest potential geopolitical shock to the global economy, given Taiwan’s strategic importance to global semiconductor production. Tariff increases are likely no matter who wins in November. Finally, we cannot dismiss potential oil shocks as the war in the Middle East rages. These risks seem manageable for the diversified global economy and financial markets at this point.

As always, please reach out to me with questions.

Sincerely, 

Scott Krase