Keith Lamoutte, CFA, Chief Investment Officer
Derek Vasko, CFA, Director, Investment Strategy
- The S&P 500 Index dipped into bear market territory but subsequently rallied at month-end to snap a seven-week losing streak and finish little changed.
- The benchmark 10-year Treasury yield topped 3% for the first time in over three years after the Federal Reserve (Fed) announced a 50-basis point (0.50%) rate hike.
- Chinese stocks buoyed emerging markets after government officials announced a series of fiscal support measures to boost the economy following renewed Covid-related lockdowns.
U.S. Equities, Treasuries Little Changed
Seems the old adage “Sell in May and Go Away” would have been appropriate, at least for the month. After falling every week in April, the S&P 500 Index continued the trend for the first three weeks of May — even dipping into bear-market1 territory — before staging a 6.6% rally in the final week of the month to claw its way back to near flat. The technology-heavy Nasdaq’s performance followed a similar trend but finished out the month with a -2.4% return.
The month kicked off with a Fed monetary policy meeting, after which a 50-basis point (0.50%) increase in the fed funds rate was announced, along with the intention to reduce its holdings of Treasury and mortgage-backed securities starting in June. Though the moves were expected, and Fed chair Jerome Powell stuck to the script in his post-meeting press conference, investors remain skeptical of the central bank’s ability to successfully rein in inflation without triggering a recession. Treasuries subsequently sold off, pushing the yield on the benchmark 10-year Note above 3% for the first time in over three years (prices move inversely to yields), but it subsequently retraced to end the month four basis points (0.04%) lower at 2.85%.
Earnings (and Consumer) Resilience
First-quarter earnings season wrapped up with S&P 500 Index-level earnings growing a respectable 9.2% year over year2, much better than the 4.6% increase analysts had forecasted at the beginning of the quarter. However, reports from retail bellwethers Walmart and Target suggested consumers are starting to shift spending habits away from more discretionary items and push back on companies passing on higher costs. As somewhat of a confirmation, retail sales fell for a third straight month, as did personal savings rates, suggesting consumers are still willing to spend but needed to dip into savings, which may be starting to impact buying preferences. Still, corporate profit margins are expected to expand, and earnings —though likely to decelerate — are expected to continue growing at a high single-digit clip through 2024 (Figure 1).
The Grass Wasn’t Much Greener on the Other Side
The narrative overseas was similar to that in the U.S., though major equity indexes in both foreign developed (MSCI EAFE Index +0.8%) and emerging markets (MSCI Emerging Markets Index +0.4%) outperformed. The somewhat better performance came despite inflation in Europe surging to record highs, which led to a rising chorus of European Central Bank (ECB) officials to begin calling for tightening of financial conditions. ECB president Christine Lagarde now expects the policy rate to move out of negative territory by the end of the third quarter (it hasn’t been positive since 2014). In emerging markets, China’s Shanghai Composite Index rose 3.5% thanks to pledges from government officials to stoke economic growth after Covid-related lockdowns in several regions including Beijing and Shanghai stifled activity for most of the month.
Oil Prices Remain Well Above $100
Elsewhere, West Texas Intermediate (WTI) oil remains well above $100 per barrel, thanks to ongoing sanctions that have removed much of Russia’s supply, while the likely pickup in China’s economic activity is expected to spur additional demand. At the same time, gasoline prices continued to post new record highs ahead of the summer driving season. Beyond the absolute impact of higher oil prices, prices at the pump have also been impacted by reduced capacity on the part of refiners who have shifted to producing more jet fuel and diesel amid increased travel demand, particularly among airlines.