Review the latest monthly market update from Signature’s CIO, Scott Mitchell.
Let’s start with a quick update on the US stock market. In May, we saw mixed results in equities. The S&P 500 had a small positive gain, while the Nasdaq Composite experienced bigger gains. The focus was once again on narrow, tech-focused companies, driven by a wave of Artificial Intelligence (AI) optimism. While the S&P 500 has remained resilient, with a 9% increase this year, the overall market performance has been one-sided. Big Tech companies have been dominating, while the average stock has seen relatively flat performance. The Dow Jones Industrial Average ended May down about 0.75% for the year, and the equal-weighted S&P 500 was down about 1.4% so far. It’s clear that, except for a few big tech names, most stocks have been struggling this year.
Moving on to other market indicators, Treasury bonds weakened, and the yield curve reached its most inverted level since before March’s banking crisis. Inversions like this, in which long-term bonds yield less than short-term bonds, are often predictors of recessions. The dollar, after two months of decline, saw a rise in value, although it is still giving back some of last year’s gains. This isn’t all bad news as weaker dollar can benefit US-based exporters. Oil prices experienced a significant drop, with an 11.3% decrease, marking the worst monthly performance since November 2021. While lower oil prices may be good for our wallets, they could be another sign of an upcoming economic slowdown.
In terms of monetary policy, the Federal Reserve raised the Fed funds rate by 25 basis points on May 3rd and indicated that it may be nearing the end of its rate hikes. Although June rate-hike expectations dropped after the meeting, there were several hawkish comments throughout the month, increasing the likelihood of rate hikes later in the year. It seems that the Fed is willing to endure short-term challenges for long-term benefits, but upcoming data will play a significant role in shaping their future policies.
Regarding corporate earnings, the first quarter results exceeded expectations. The earnings growth rate for S&P 500 companies was -2.1%, surpassing the expected -6.7%. So, while earnings contracted, the news wasn’t as bad as anticipated. This has boosted confidence in year-end S&P forecasts.
Overall, there hasn’t been much change in the bull/bear debate during the month. Bullish investors see positive factors such as better-than-feared earnings, a likely resolution to the debt ceiling issue, the Federal Reserve approaching the end of its rate hikes, slowing inflation pressures, strong consumer spending, a healthy job market, reduced fears of a banking crisis, and diminished concerns of a recession. Bears, on the other hand, are worried about potential future Fed hikes, the delayed effects of past rate increases, tighter credit conditions after recent bank stress, and narrow market leadership based on unbridled optimism in AI.
My view is that the market will likely remain range-bound in the coming weeks and months. Given the considerable uncertainty and mixed signals regarding the economic outlook, many investors are adopting a cautious approach. The market has become too focused on technology stocks, creating a significant divergence between winners and laggards. This increases the likelihood that a period of consolidation will be necessary before the market can make a sustained upward move.
On a lighter note, I mentioned vacations earlier, and I want to assure you that our Investment Committee and your team of advisors will be available throughout the summer. One of the great strengths of Signature Wealth Group is our large team and vast resources. I encourage you to take advantage of the expertise of our more than 50 associates.
Please note that the markets will be closed on Monday, June 19th, in observance of Juneteenth, and again on Tuesday, July 4th, to celebrate Independence Day.
I wish you a fantastic summer, and remember that your advisor is always here to address any questions or concerns you may have.