- The S&P500 posted its fourth consecutive positive month, gaining 12.62% year to date.
- The rotation into value stocks continued in May with energy, materials and financials leading the market higher.
- Treasury yields have stabilized over the past few months, but inflation worries may lead to higher rates over the next year.
Investors following the old adage of “sell in May and go away” missed out on the fourth consecutive month of positive returns in the S&P500 as the broad index gained 0.7%. Year to date the index is up 12.62% which may be tempting to lock in gains. However, history has shown us that market timing is such a difficult task because getting back into the market “when things calm down” is no easy task. Things are never calm. Right now the market is grappling with high inflation expectations, a growing budget deficit, supply chain shortages, tensions in the middle east, etc. Staying invested through the pandemic last year was prudent so staying invested through the summer if you are a long-term investor probably makes sense.
Returns in May were a bit uneven as value stocks continue to lead growth stocks. The Russell 1000 Value gained 2.33% as energy (5.77%), materials (+5.22%) and financials (+4.79%) were the leading sectors. Small caps (+0.21%) underperformed large caps while international stocks performed relatively well. The MSCI EAFE Index which measures international developed markets gained 3.26% in May. With Europe emerging from the lockdowns, global economic growth expectations are high but still fragile. New coronavirus outbreaks in Asia and higher energy prices could be headwinds to the global economic recovery in the coming months.
Interest rates have stabilized here in the U.S. even as inflation seems to be trending higher. Should inflation remain high or stabilize once the economy is fully opened remains a key component on where interest rates go from here. The Barclays Bloomberg US Aggregate Bond Index gained 0.33% in May but is still down 2.29% for the year. Strong corporate earnings have allowed investment grade and high yield corporate bonds to outperform Treasuries this year by a wide margin. Municipal bonds have remained rather steady, gaining 0.3% for the month and 0.78% for the year as investors eye infrastructure stimulus coupled with higher expected tax rates that may be coming this year.
Sources: Morningstar Direct, Wall Street Journal, Charles Schwab