Though April showers traditionally bring May flowers, we instead saw it bring market volatility in May. Mounting concerns about the looming debt ceiling deadline had investors worried about the potential fallout, which cast a pall over financial markets for the month. Even after the White House and GOP struck a deal to (hopefully) avoid the default, concerns persisted about whether Congress would pass the bill.
Early in the month, amid concerns about the banking sector and tightening credit conditions, the Federal Reserve (Fed) elected to increase interest rates by 0.25%, citing elevated inflation and robust job gains. They indicated that while they might pause future rate hikes, the decision would be based on prevailing economic conditions, particularly since the current 4.9% annual inflation rate far exceeds the Fed’s 2.0% goal. Fed members in support of future rate hikes suggested that inflation was declining too slowly.
While the Fed may see the decline as too slow, inflation at least continued its downward trend in May. The year-over-year price increase of 4.9% was the lowest since April 2021. This bit of good news means that as the inflation rate continues to decline, there will be less pressure on the economy and household budgets (although it may take several months for consumers to start seeing the effects).
Mid-month, there were signs that the housing market may be staging a turnaround after a long period of contraction. An increase in home builder sentiment put the National Association of Home Builders Housing Market Index’s confidence level at the midpoint for the first time since July 2022. New single-family home sales increased in April, climbing 4.1%. That optimism was tempered, however, by a decrease of 3.4% in the sale of existing homes.
Technology and AI (artificial intelligence) stocks, which have led the market this year, were under pressure as traders began to anticipate the possibility of future rate hikes. One particularly well-known chipmaker saw its stock surge 36% in May.
In other news, the Writers Guild of America (WGA) labor union went on strike in May. It’s the largest interruption to American television and film production since the Covid-19 pandemic and the most significant labor stoppage for the WGA since the 2007-2008 strike. As a result, multiple films, shows, and podcasts have been delayed or shut down. Looks like it could be a long summer of re-runs.
Last month we continued to see the impacts of severe weather events, with many lives worldwide lost to floods, earthquakes, wildfires, hurricanes, tornadoes, and more. Consumers will likely continue to see insurance premium increases resulting from the upswing in property losses and ongoing high costs for construction materials. In fact, it was reported in May that State Farm Insurance will no longer accept new insurance applications for homes and businesses in California, citing wildfire risks.
And a quick reminder for anyone who is a college student or knows one: the FAFSA (Free Application for Federal Student Aid) deadline to submit the application is June 30 at 11:59 Central time. To qualify for federal financial aid and student loans, students must submit the FAFSA application each year, and missing the deadline means you may not be eligible for federal financial aid. So, don’t wait until the last minute.
We’re grateful to be part of your financial coaching team. If there’s anything you need, please schedule some time with our office.
Markets offered quite a mixed bag in May with a wide berth separating the strongest from the weakest-performing indices. The S&P 500 Index continued to grind higher by +0.43% in the face of numerous economic and political headwinds, propped up by a stronger-than-expected tail end of earning season. The NASDAQ 100 Index (comprised mainly of growth-oriented tech stocks) posted a robust +7.73%, driven by a narrow band of companies: Nvidia, Alphabet, and Amazon to name a few. Value-oriented blue-chip stocks retreated with the Dow Jones Industrial Average declining -3.17%, snapping a two-month winning streak.
In U.S. sector performance, growth -- particularly those stocks higher up on the cap spectrum -- performed best, while value and small-cap fared poorly. Of the 11 sectors, three finished the month higher, with Information Technology by far the best performer, closing the month up nearly +9.41%. Energy stocks, the best-performing sector in 2022, were the biggest laggard in May, returning -10.03%. Unease over the approaching debt ceiling pushed Brent and WTI prices down on fears that a default would produce an economic crisis, curtailing demand.
The Federal Reserve met early in the month and unanimously decided to raise the target range of the federal funds rate to 5.00 - 5.25% (at the time, signaling being closer to the end of their rate hiking campaign than the beginning). In the latter half of the month, middling debt ceiling talks and the increased expectations for another interest rate hike saw U.S. Treasury yields rise significantly. Unsurprisingly, the bond complex was broadly negative, with the U.S. Aggregate Bond Index down -1.09%, U.S. Corporate Bond Index down -1.45%, and U.S. Treasuries down -1.14%.
The old stock market adage “Sell in May and Go Away” hasn’t quite come to fruition, as another month of positive performance was tacked onto 2023. The saying, attributable to the Stock Trader’s Almanac, refers to the best six months of the year. Historically, the top performing 6-month rolling period, on average, has been November through April. What’s interesting about this year is the breadth (or lack thereof) that has been driving performance, with only a handful of tech stocks -- Nvidia, Apple, Alphabet, Meta, and Tesla -- responsible for the bulk of 2023’s gains. Healthy balance sheets and a plethora of cash in a period of high inflation and broad economic uncertainty have created a safe haven of sorts for these names, driving interest from investors.
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THOUGHT FOR THE MONTH
Dow Jones Industrial Average: The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.
Dow Jones U.S. Real Estate Total Return Index: The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.
NASDAQ Composite: The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector.
S&P 500 Bond Index: The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.
S&P 500 Consumer Discretionary: The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.
S&P 500 Consumer Staples: The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.
S&P 500 Energy: The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.
S&P 500 Financials: The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
S&P 500 Index: The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.
S&P 500 Utilities: The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.
S&P U.S. Treasury Bond Index: The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.
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Monthly Market Newsletter, May 2023
June 14, 2023