May Market Recap
June 1, 2021
Sometimes, “boring” is what investors need most.
The stock market was short on surprises in May as most of the recent financial trends remained in place. The final few weeks of quarterly corporate earnings continued to exceed consensus estimates. The latest economic data painted the clearest picture yet that inflation is taking hold. And, thankfully, the progress Americans have made toward national vaccination goals led to fewer restrictions and more consumer spending.
The S&P 500 drifted slightly higher in May, the sixth time it has done so in the last seven months (ho-hum). The Dow posted the best performance of the three major equity benchmarks. The NASDAQ fell 1.5%, although Growth stocks actually outperformed Value in the final two weeks of the month.
Seven of the 11 sectors in the S&P 500 booked gains in May, led by Materials (+5%), Energy (+4.9%), and Financials (+4.7%). Consumer Discretionary (-3.9%) and Utilities (-2.8%) performed the worst.
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If anything caught the market by surprise in May, it was the latest jobs report. The US economy added 266,000 jobs in April, nowhere near expectations of 1 million or more. Many placed the blame for slower job growth on a shortage of workers and supply-chain bottlenecks. The national unemployment rate ticked higher to 6.1%.
Relative to expectations, corporate earnings have rarely been better than they are right now. More than 85% of S&P 500 companies beat consensus earnings-per-share forecasts in the first quarter, the highest percentage since data research firm FactSet began tracking the information in 2008.
The most-cited inflation gauge, the Consumer Price Index (CPI), has increased 4.2% from a year ago. That’s the fastest rate of inflation in more than 12 years. A separate measurement of inflation tracked closely by the Federal Reserve (the core personal consumption expenditures index) has risen 3.1% year-over-year, well above the Fed’s 2% target.
At this point, accelerating inflation is undeniable. It remains up for debate whether such forces will be “transitory,” as Fed Chair Jerome Powell suggested, or turn out to be stickier. So far, financial markets have digested the reality of inflation without much incident, a sign perhaps this has been long expected.
The steady stream of data revealing meaningful inflation finally jumpstarted gold prices, which gained nearly 8% last month. Gold had remained stubbornly low for much of the year, causing some to wonder whether cryptocurrencies had taken its place as a true inflation hedge.
The theory of crypto as “digital gold,” however, failed a major litmus test last month. Bitcoin fell 35% in May amid speculation of looming government regulation.
National efforts to vaccinate Americans against COVID-19 have led to real progress. The daily US death rate (7-day average) fell below 500 last month. In 22 states, more than 65% of the adult population has received at least one dose of the vaccine.
With a growing number of people vaccinated, numerous states have lifted mask mandates and eased social distancing guidelines. Better public health and fewer restrictions both lead directly to a stronger economy.
We got relatively few developments in political negotiations surrounding President Joe Biden’s proposed infrastructure spending. Biden has suggested increasing both the long-term capital gains rate (on Americans earning more than $1 million per year) and bumping the highest marginal income tax rate back to 39.6% (from 37% currently), though neither elicited much change from Republicans.
Small-cap stocks were mostly flat as the Russell 2000 returned 0.1% in May. International equities outperformed, especially Non-US Developed Markets, which gained 3.5%. Emerging Market equities were up 1.7%.
Crude oil prices finished the month just below $67 per barrel, their highest mark since October 2018.
10-year US Treasury yields stayed steady, closing the month little changed at 1.58% (compared to 1.63% a month earlier).
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