May brought a breath of fresh air to the major US equity indices after a lackluster April, with significant rebounds marking a turnaround. The S&P and Nasdaq pleased investors with five consecutive weeks of gains, although they saw slight dips towards the month’s end. Yet, persistent concerns about market concentration cast a shadow, notably impacting the equal-weight S&P, which trailed behind. Tech giants continued to steer market performance, contributing to over half of the S&P’s May gains. This causes some market observers to wonder if the stock market really is doing well, or if it’s just a handful of companies that are doing well and camouflaging overall weakness. For sure, if you don’t own those tech leaders, your portfolio returns probably aren’t going to match the S&P 500’s. There’s wisdom in diversification, though, so I’d encourage you to make sure that you’re not too heavily concentrated in just a few stocks.
Despite some late-month weakness, Treasury bonds strengthened May, pushing yields lower. The US dollar reversed its four-month upward trend, helping stocks, while also helping gold to mark its third consecutive month of gains.
The Federal Reserve remained a focal point, with continued expectations that the Fed’s overnight rate would remain steady until later in the year. This is in sharp contrast to late 2023 predictions of several rate cuts by the Fed this year. Economic data presented mixed signals, with softer indicators prevailing. April nonfarm payrolls fell short of consensus, and there was a monthly decline in April’s retail sales, signaling potential consumer concerns. Manufacturing and service surveys for April were mainly weaker, although there was a substantial uptick in consumer confidence. I think that maybe consumers are seeing a light at the end of the inflation tunnel.
Corporate earnings were a bright spot, with S&P companies surpassing expectations, on average. However, the magnitude of those beats fell below historical averages, raising questions about sustainability. In other words, earnings were very good, but are they good enough to support continued stock market gains?
Now that earnings season is pretty well wrapped up, we’ll shift from company-specific reports to macroeconomic factors, including inflation reports, jobs data, and the upcoming Fed meetings. Recent data suggests a moderation in the main engine of US economic growth—the consumer. Downward revisions to economic reports show slowing consumer spending. Thankfully, evidence of disinflation is mounting, and may be enough to reverse this trend. Major retailers are slashing prices, fast-food chains are offering value meals, and travel discounts are becoming more prevalent, signaling relief for budget-conscious consumers. Generally speaking, I think this is positive for overall fiscal health. Economists have complained for months now about out of control consumer spending, and that appears to be correcting. And if inflation really is slowing—which it seems to be—that would leave most of us with more income that we could save or spend. Recent evidence, although limited, indicates that many “experiences,” like concerts, are coming down in price, too, so hopefully the extra money in our pockets will allow us to afford some things we’ve been putting off. If we decide instead to save the money rather than spend it, that should have the effect of lowering inflation even further and could push up stock prices if the money is invested.
This shift to a new regime of lower inflation is likely to cause stock market volatility, in my opinion. It’s going to require a change in expectations, and there could be different winners and losers. Again, diversification, while not a guarantee against losses, is usually a wise strategy for long-term investors looking to avoid having to choose between short-term winners and losers.
As we enter June, bullish sentiments persist regarding further disinflation, solid corporate earnings, a healthy labor market, and continued (albeit slower) consumer spending. Given the pivotal role of Fed expectations and bond yields in recent years, monitoring bond yields closely remains prudent. If bond yields reverse course and head higher, that would likely pose a headwind for stocks and correspond to increased volatility. Conversely, continued moves downward in bond yields could fuel further upside in stocks.
While optimism about disinflation and economic health persists, uncertainties surrounding Fed policy and market dynamics warrant caution. As we navigate these evolving market conditions, staying informed and vigilant is key to making informed investment decisions.
In June, the market is closed on June 19 in observance of Juneteenth, and of course it will be closed on July 4th (there is also an early market close on July 3). For those of us on the East Coast, hurricane season is about to get going, so now is a great time to review your property and casualty insurance…we can help with that, if you’d like. And last, but certainly not least, happy Father’s Day to all of the dads and father figures out there!
