May Market Commentary

Market Commentary

US Stocks were relatively flat in May as positive economic news eased recession fears. Earnings for S&P 500 companies continue to be strong, but many companies issued profit warnings for future quarters driving recession fears. Economic news was positive over the month. US employers added 428,000 workers to their payrolls in April, above the estimated 395,000. The unemployment rate held steady at 3.6% in April. Wage growth slowed slightly, increasing 0.3%, below forecasts for a 0.4% gain. US retail sales rose for a fourth consecutive month, up 0.9% in April compared to March. Industrial production increased by 1.1% in April for a fourth straight month of gains. CPI increased by 8.3% in April, slightly higher than the expected 8.1%, but lower than the 8.5% increase in March. The personal consumption expenditures index, the inflation gauge the Fed prefers, also showed signs of easing. The index was up 0.2% in April and 6.3% from a year earlier, compared to March which was up 0.9% monthly and 6.6% annually. The producer price index rose 0.5% in April as expected, a reduction from the 1.4% increase in March. US housing sales declined for a third straight month as record home prices and rapidly rising mortgage rates cool down the housing market.

Foreign stocks were positive for the month driven by strong performance from European stocks. In a sharp pivot from previous statements, the European Central Bank (ECB) president stated the ECB would likely increase its key interest rate from -0.50% to zero by September and could keep raising rates after that. The ECB suggested it could raise its key rate by 0.25% at each of its next seven meetings, reaching a level of 1.25%. The eurozone’s headline inflation rate hit 7.4% in April, slightly lower than March’s 7.6%. China’s CPI increased by 2.1% in April from a year earlier, slightly above the expected 2% increase. The increase was the biggest jump in five months, accelerating from March’s 1.5% increase. Chinese retail sales declined by 11% in April from a year earlier, it was the second straight month of declines and the largest contraction since March 2020. Oil prices ended the month at $114.67, up 9.53% for the month. Emerging markets have trailed developed markets in May, the year to date, and over the trailing twelve months.

Interest rates fell in May pushing bond prices up for the month. The Fed increased its benchmark rate by a half percent, the largest increase in over two decades, and plans to reduce its asset portfolio. Fed officials broadly agree that additional half percentage point increases may be warranted in upcoming meetings. The Fed plans on shrinking its asset holding passively by allowing bonds to mature without reinvesting the proceeds into new securities rather than by selling them in the open market. The yield on the 10-year Treasury fell in May to 2.84% from 2.89% in April. The average rate for a 30-year fixed mortgage has risen to 5.1%. Municipal bonds were the top performers for May and year to date. Longer term bonds outpaced shorter term bonds for the month, but shorter term bonds topped longer term bonds for the year to date.