Clearview Portfolio Consulting May Market Recap
Key Points:
- The US Government avoided a default on its bonds as the debt ceiling was raised in a sigh of relief to investors.
- Stocks moved higher in May and are having a strong year but the increase in gains has been narrow in scope.
- The bond market saw yields rise as nervous investors sought the safety of cash.
The global economy avoided a catastrophic debt default by the US Government as both parties of Congress agreed to an increase to the debt ceiling with cuts in federal spending. The risk of default has been removed from investor concerns, but elevated inflation, tight credit conditions and a slowing economy are still present. The threat of a recession in the back half of this year still looms, but US investors continue to look beyond the current issues. The S&P500 advanced in May, gaining 0.43%. Year to date the index is up 9.65% but the sectors in positive territory have been rather narrow. Technology (+33.95%), communications services (+32.81%) and consumer discretionary (+18.73%) are the only sectors positive for the year. The equally weighted S&P500 (where every stock gets the same weight) is down 0.63% year to date.
This narrow set of stocks that is moving the market higher can be attributable to some mean reversion, as these were the worst sectors of 2022. However, the top 7 stocks of the S&P500 are all up over 30% for the year, while more than half of the stocks in the index are down. Investors have flocked back to tech names as the interest in artificial intelligence companies has exploded. People across the globe are experimenting in ChatGPT and weighing the possibilities (good and bad) for the technology.
International stocks fell in May with a combination of a strengthening US Dollar and high inflation weighing on consumer spending abroad. Chinese stocks dropped 8.4% for the month as global economic slowdown is weighing on manufacturing. The opening of the Chinese economy after severe lockdowns has lost steam and slower growth rates are now being priced into investments.
The US bond market saw yields climb in May as investors moved away from those Treasury securities most vulnerable to a missed payment in the event of a default. As a result, the Bloomberg US Aggregate bond index dropped 1.09% during the month but still has a 2.46% gain for the year. Attractive yields on short-term debt have lured investors to money market mutual funds. According to the Investment Company Institute (ICI) money market assets hit an all-time high of $5.4 trillion. With the debt ceiling fight out of the way and inflation continuing to head lower, the bond market may begin to stabilize after a volatile 18 months.
Sources: Morningstar Direct, Wall Street Journal, BEA.gov