May Market Commentary

In May US stocks continued to rebound driven by optimism over businesses reopening and the potential for vaccines.  Many states began to roll back their restrictions on business with all states expected to be open by early June.  Currently, there are more than 10 different vaccines that have shown promise and are going through various levels of testing, driving investors hopes that prevention from the virus could exist as soon as early next year.  With nearly all S&P 500 companies reporting earnings, 64% posted earnings that topped estimates, however, earnings as a whole fell 14.6% for the quarter.  Economic news was rough in May, but economists hope that the numbers posted reflect the economy at or near the bottom.  There were 20.5 million job losses in April and the unemployment rate surged to a high last seen during the depression at 14.7%.  Initial jobless claims filed since mid-March reached 38 million in mid-May.  However, near the end of the month, the total number of workers receiving unemployment benefits declined for the first time since February.  US retail sales fell 16.4% and manufacturing output dropped 13.7% in April.  Both were records.  First quarter GDP was revised down to a 5% contraction.  On the positive side, purchasing manager surveys showed global business activity had slower declines in May, and consumer sentiment in May improved over April.  For the month, US stocks climbed 5.35% and are now only down 5.63% for the year to date.

Foreign stocks gained as well in May driven by the loosening of lockdowns and stimulative measures.  EU officials projected that the region would suffer “a recession of historic proportions this year” due to the pandemic.  Germany fell into recession in the first quarter with GDP dropping 8.6%.  It was the second fastest rate of contraction since reunification.  France, Italy, and Spain posted GDP declines of 21.4%, 17.7%, and 19.4%, respectively. As a result, the EU is working on a $2 trillion coronavirus response plan that would significantly deepen the country bloc’s economic union. Japan moved into recession in the first quarter when its GDP contracted 3.4%.  Oil surged over the month, rising 88% to finish at $35.49 a barrel on improved demand and production cuts.  China has shown some gains since lifting its lockdown with industrial output improving, but retail sales remain weak. China elected for the first time in 25 years to not list a GDP growth target for 2020.  China’s central bank said it would continue to roll out measures to support its economy and be flexible with its monetary policy.  Emerging markets trailed developed markets over the month and year to date.  Foreign stocks rose 3.62% in May, but are still down 14.48% over the year to date.

Bonds gained in May as interest rates were steady.  Fed chief Powell said in congressional testimony the Fed would use “its full range of tools to support the economy” and that further fiscal stimulus was likely needed to help support the economy.  Comments made by Fed Governors make it unlikely the Fed would use negative interest rates as a monetary tool.  The 10-year Treasury yield was essentially flat over the month ending at 0.65%.  For the month, muni and credit bonds were the top performers with longer term maturities outpacing short term maturities. Over the year to date, it was US government bonds leading the way with longer maturities outpacing.  In May, the US bond market rose 0.76% and has gained 4.63% over the year.