Mixed May for Markets
Markets sold off early in May before a late-month rally brought them close to even and led to mixed results for the three major U.S. equity indices. The S&P 500 gained 0.18 percent while the Dow Jones Industrial Average (DJIA) gained 0.33 percent. The Nasdaq Composite was down 1.93 percent.
Per Bloomberg Intelligence, as of May 27, 2022, with 98 percent of companies reporting, earnings growth for the S&P 500 in the first quarter was 9.1 percent (up from April’s 8.7 percent and analyst estimates for 5.2 percent growth). First-quarter outcomes were impressive given headwinds companies faced due to rising Covid-19 case growth and high inflation.
While fundamental factors were supportive, technical factors were not. All three major U.S. indices ended below their respective 200-day moving averages for the second consecutive month. It’s too early to say if investors have soured on U.S. equity markets, but the pattern is potentially concerning.
International markets fared slightly better in May, though developed and emerging markets saw selloffs before rebounding into positive territory. The MSCI EAFE Index gained 0.75 percent while the MSCI Emerging Markets Index gained 0.47 percent. Both major international indices were below their respective 200-day moving averages for the fifth month in a row.
Fixed income markets also experienced moderate gains, driven mostly by falling long-term interest rates. The 10-year U.S. Treasury yield fell from a mid-month high of 3.12 percent to 2.85 percent at month-end, which supported bond prices. The Bloomberg U.S. Aggregate Bond Index gained 0.64 percent.
For high-yield fixed income, concerns about slowing growth hit high-yield valuations, followed by a rebound that brought the index into positive territory. The Bloomberg U.S. Corporate High-Yield Bond Index returned 0.25 percent, the first monthly increase for the index this year. High-yield credit spreads widened in May, indicating investors grew more cautious.
Signs of Stabilization in May
May’s interest rate news was positive, with encouraging signs of long-term rate stabilization. The Federal Reserve (the Fed) hiked the federal funds rate by 50 basis points (bps) at its May meeting, but the market reaction was relatively muted. While long-term rates saw some volatility, they ended down notably from the intramonth high.
April’s inflation reports showed that consumer and producer inflation moderated, with smaller price increases in April. On a year-over-year basis, consumer and producer price growth slowed in April compared to March. While there is still a lot of work to be done, this is an encouraging step.
Looking to the pandemic, there were signs of stabilization. Average daily case growth fell from roughly 62,000 cases at the end of April to roughly 47,000 cases at the end of May. While this is still higher than lows in March and we aren’t out of the woods, it points toward possible lower pandemic-related risks ahead.
Positive Economic Growth Continues
The April jobs report showed more jobs were added than expected, marking 16 consecutive months with strong jobs growth. The 3.6 percent unemployment rate matched the pandemic-era low and neared the pre-pandemic low (3.5 percent). The labor market’s impressive progress over the past two years is a key reason why the economy remains healthy.
The strong labor market continued to support solid consumer spending progress in April. Retail sales and personal spending came in above economist estimates in April. As you can see in Figure 1, the absolute level of retail sales increased above pre-pandemic levels and growth has been strong in 2022.
Figure 1. Retail Sales, 2017–Present
Business spending growth was solid, with durable goods orders up 0.4 percent in April. Industrial production and manufacturing output increased by more than expected in April and capacity utilization—actual versus potential industrial output—approached a 15-year high.
May’s data reports showed notable signs of weakness for the housing sector despite it having been a bright spot in economic recovery. In 2022, rising mortgage rates, a lack of supply of homes for sale, and rising prices have served as headwinds. Housing sales may continue to cool from the pandemic-era peak of 2021, though this should lead to more affordable prices and a healthier long-term market outlook.
Risks Remain, as Does Continued Growth
May saw risks stabilize or in some cases decline, but equity market selloffs earlier in the month were a powerful reminder that uncertainty remains. It’s important for investors to balance immediate headline risks with long-term fundamentals and to construct portfolios that can withstand short-term volatility.
The Fed’s plan to tighten monetary policy will continue to present market risks, especially if the central bank surprises investors with timing and size of rate hikes. The pandemic, geopolitical risks from the war in Ukraine, and pandemic-induced lockdowns in China are also potential risk factors.
Despite those risks, though, economic fundamentals in the U.S. remain positive and the most likely path forward is continued recovery and growth. The strong job market and sustained healthy levels of consumer and business spending are expected to serve as a tailwind for overall economic growth heading into the summer, though we may see modest setbacks.
While we may see bouts of uncertainty and potentially periods with market selloffs, a well-diversified portfolio that matches investor goals with timelines remains the best path forward for most. As always, please reach out to us to discuss your current plan if you have concerns.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. One basis point is equal to 1/100th of 1 percent, or 0.01 percent. Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, manager, fixed income, at Commonwealth Financial Network®. © 2022 Commonwealth Financial Network®
