In a nutshell
May was a month with volatile price movement, both down and up. For the month:
- The S&P 500 index of large stocks managed a slight gain of 0.18%, closing near the 4125 level. However, at one point intra-month, the S&P 500 was down 5% and almost 20% (bear market) from its recent high of 4800 at year-end 2021.
- International and emerging market equity markets rose modestly (1% and 0.5%), even with the ongoing Ukraine Russia conflict and the COVID-related shutdown of major cities in China.
- Fixed income (bonds) had their first positive month all year as prices rose and interest rates fell modestly. However, as measured by the broad US Aggregate bond market, bonds are still down 8.9% year to date!
The epicenter for the carnage in stocks remains in technology. Mid-month, the technology-laden Nasdaq 100 index was down 29% from its all-time high in December 2021. Companies like Facebook (FB), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL) down 3.4%, 3.3%, 1.8%, and 5.5% for the month. At the start of 2022, the ten largest companies in the S&P 500 made up greater than 30% of the total market capitalization. One of the issues having a negative impact on multinational companies is the strong US dollar.
It might surprise most that international and emerging market stocks have slightly outperformed the S&P 500 YTD (as of 5/31/22). This supports the argument that valuations matter. When valuations are low, as they were for international stocks vs. US stocks, investors are more willing to overlook current state of affairs for longer term profits. Conversely, when valuations are high investors are much more sensitive to any negative news. There are also some positive signs that the issues overhanging Chinese stocks, regulatory concerns and zero-tolerance COVID policy, may be easing. (Bloomberg: Worst May be Over for China’s Stocks).
Fixed income (bonds) had their first positive month all year. Early in the month the 10 year treasury briefly popped over 3% a level not seen since 2018. Bond and cash accounts become more attractive as yields rise, allowing investors to earn something on their money without taking excessive stock market risk. It’s also at these levels where we start to see a more traditional negative correlation between stocks and bonds where bonds rise when stock price fall and vice-versa.
Persistently high prices for goods and services and inflation continue to weigh on markets. Average US gasoline prices hit $4.54 in May and may eclipse $5 during the peak summer driving season. And food prices are up across the board. On the services side, anyone who has booked a flight or hotel room recently has likely experienced sticker shock compared to last summer's prices. Higher fuel prices, labor shortages in the airline and hospitality industry, and overall continuing supply chain challenges are keeping upward pressure on just about all goods and services in the economy. It’s to be expected that inflation will come down as pandemic pent-up demand burns itself out and supply chains normalize. However, what will likely remain is “sticky inflation” – chiefly higher wages.
It's unclear whether interest rates have stabilized or are likely to move higher. The Federal Reserve has told the markets they will increase interest rates by 0.50% in June and 0.50% in July. On top of that, the Fed will start selling $47.5 billion in bonds (Treasury securities and mortgage-backed securities) beginning on June 1st. After three months, the sales will increase to $95 billion a month. These bond sales are likely to keep 10-year and 30-year bond yields from declining much in subsequent months.
Recession fears continue increasing. Europe is almost certainly already in recession. In addition, China has maintained its lockdowns as they battle the omicron COVID variant. These shutdowns have further added to worries about problems in the global supply chains, many of which are still not back to pre-COVID levels globally.
Job growth in the US remains robust, and wage increases continue. There are currently 1.9 jobs open for every person unemployed (11.4 million job openings for 5.9 million unemployed)! While rising wages help workers offset the cost of their everyday purchases, wage increases and higher cost inputs are likely to pressure corporate profit margins for the balance of 2022. At the end of May, the negative earnings news from both Walmart and Target highlighted this point quite explicitly.