June 1, 2016
Upon further review of investment performance in May, there were Technology stocks and there was everything else.
From January through April, Technology had been the worst-performing sector in the S&P 500 as cautious investors shunned the higher growth and higher risk generally associated with the category. Tech busted out of its slump in a big way last month, gaining 5.6% in a span when the Dow Jones Industrial Average was essentially flat.
Such a strong showing from one of the market’s more cyclical sectors bodes well for US equities in general, although investors’ immediate attention remains locked on the timing of the Federal Reserve’s next interest rate hike.
Broad equity performance was more muted in May. Seven of the 10 sectors in the S&P 500 finished positive, but other than Technology the gains were minimal. Energy, Industrials, and Materials were lower, but all lost less than 1%.
|Index||May 2016||YTD 2016|
Weak economic growth in the first quarter of 2016 and underwhelming employment data in early May led most market observers to conclude it would be late in the year before the Fed seriously considered another interest rate increase. Those folks were caught off guard when Fed minutes released on May 18 indicated an interest rate hike remains possible as early as June. That realization created a surge of volatility in equities, which fell to their lowest point in two months on May 19.
Fed Chair Janet Yellen in her latest comments suggested that economic growth looks to be picking up following the tepid first quarter. According to Yellen: “If the labor market continues to improve, which I expect to occur, it would be appropriate for the Fed to gradually and cautiously increase rates over time and probably in the coming months.” In our view, it would take a significant shock to the global economy for the Fed to delay its next rate increase beyond September.
The idea of facing higher rates sooner than expected caused the US dollar to strengthen and bank stocks to increase. The most yield-oriented companies like Telecom and Utilities — the two best-performing sectors year-to-date — suffered but avoided a sharp pullback.
Oil prices continued their recovery. West Texas Intermediate crude rose another 7% in May to finish just above $49/barrel. Oil briefly touched the $50 threshold intraday on May 31, something it had not done since July 2015. As of month-end, oil was up nearly 90% from its Feb. 11 low.
Sales of newly constructed US homes surged to their highest point in more than eight years and new home prices set a record high, according to the US Commerce Department. New homes account for roughly 10% of all residential real estate transactions.
Nationally, home prices continue to rise steadily. If residential real estate continues increasing at the pace we saw in the first quarter, home prices (in the 20 largest US cities) will grow another 9-10% in calendar year 2016. Seattle, Portland, and Denver experienced the biggest increases.
Despite the stream of mostly positive economic data, pessimism remains high. Goldman Sachs, Merrill Lynch, and Citi were among the major investment firms publishing opinions in May highlighting a cautious outlook for stocks in the months ahead.
The American Association of Individual Investors reported that bullish sentiment is at its lowest point in 18 years. The “Sell in May and Go Away” subscriptions are running at healthy levels, but we reiterate our perspective that market tops rarely occur when the consensus feeling is this bearish.
Outside the US, some of the headwinds have abated in recent months. The latest threat to the global economy is the possibility of Great Britain exiting the European Union. A voter referendum on the “Brexit” is scheduled for June 23, which is roughly a week after the next Fed meeting. It seems a growing number of investors are waiting to find out the results of those two events before deciding how comfortable they feel investing further in stocks.