Supply and Demand
In May 2024, the stock market experienced significant gains, driven by positive economic data and investor sentiment. Here is a detailed summary of the key developments:
Overall Market Performance
The Dow Jones Industrial Average rose by 2.3%, marking its best daily gain of the year on the last trading day of May [1] [2].
The S&P 500 increased by 4.8%, continuing its strong performance from previous months [1] [3].
The Nasdaq Composite surged by 6.9%, despite some volatility in the tech sector [1].
Sector Highlights
Consumer Stocks: Benefited from positive Personal Consumption Expenditures (PCE) data, with notable gains in companies like McDonald’s, Home Depot, and Coca-Cola [1].
Technology: Experienced mixed results. While Nvidia and Microsoft remained relatively stable, Dell Technologies and Marvell Technology faced declines due to disappointing earnings and profit concerns [1] [2].
Retail: Gap Inc. saw a remarkable 22-28.6% increase in its stock value after reporting strong quarterly results and raising its annual sales forecast [1] [2] [3].
Healthcare: Health insurers gained amidst concerns over healthcare costs [1].
Economic Context
Inflation Data: The core PCE index, a key inflation gauge, showed a year-over-year increase of 2.7%, slightly down from the previous month's 2.8%. This aligned with market expectations and eased concerns about rapid inflation [4] [2].
Federal Reserve: The Fed maintained its interest rates but hinted at potential rate cuts later in the year, contributing to positive market sentiment [3].
Market Sentiment
Investor Optimism: Despite some weekly declines, the overall sentiment remained positive due to strong earnings reports and expectations of easing inflation [1] [4].
Volatility: Treasury yields retreated slightly, with the 10-year yield ending at 4.55%, which helped boost investor confidence in equities [4] [3].
Notable Stock Movements
Caesars Entertainment: Jumped 11.6% after reports of activist investor Carl Icahn's significant stake [1].
Zscaler: Climbed 8.5-17% following an unexpected profit report [1] [2].
Salesforce: Faced challenges with a grim second-quarter forecast, impacting the tech sector [2].
Global Markets
Asia and Europe: Mixed performance, with the Shanghai Composite index experiencing a modest decrease due to unexpected contraction in China's manufacturing sector [4] [3].
Overall, May 2024 was a strong month for the stock market, characterized by significant gains across major indices, driven by positive economic data, strong earnings reports, and investor optimism about future interest rate cuts.
Bond Markets
Based on the provided information, here's a summary of the bond market for May 2024:
Treasury Market Performance
Treasury yields generally decreased across the curve in May, with the 10-year Treasury yield falling to 4.20% by month-end, down from 4.25% at the end of April [6].
The Bloomberg U.S. Treasury Bond Index gained 1.46% for the month [6].
The yield curve remained inverted, though the inversion between 2 and 10 years reduced slightly [6].
Corporate Bond Market
The Bloomberg U.S. Corporate Investment Grade Index gained 1.87% during May, with positive excess returns of 0.30%[6].
Investment-grade corporate bond spreads tightened by 2 basis points, ending the month at an option-adjusted spread of 85 basis points[6].
High-yield bonds performed well, with the Bloomberg U.S. High Yield Index gaining 1.18% for the month[6].
BBB-rated bonds outperformed other investment-grade ratings[6].
Municipal Bond Market
The municipal bond market faced some pressure due to high supply, with May issuance reaching $43.9 billion, 47% higher than the same month in 2023[6].
The Bloomberg Municipal Bond Index fell 0.29% for the month [7].
Municipal bond yields increased, particularly in shorter maturities, further inverting the yield curve[6].
Municipal bond funds saw modest net inflows of $200 million in May[6].
Economic Context and Federal Reserve Policy
Inflation data released in early May showed signs of progress towards the Fed's 2% target, with the core Personal Consumption Expenditures (PCE) index rising 2.7% year-over-year[6].
The Federal Reserve maintained its target rate range, but minutes from the Federal Open Market Committee (FOMC) suggested some members held hawkish views on future rate policy[6].
Market expectations shifted towards potential rate cuts later in the year, contributing to the decline in yields[6].
Market Sentiment and Volatility
Bond market volatility decreased, as measured by the ICE Bank of America/Merrill Lynch Option Volatility Estimate (MOVE) Index.
Investor sentiment improved due to signs of economic slowdown and progress on inflation, supporting bond prices.
Overall, May 2024 was a positive month for most segments of the bond market, with declining yields and generally positive returns across Treasury, corporate, and high-yield sectors. However, the municipal bond market faced challenges due to high supply. The market's focus remained on inflation trends and potential shifts in Federal Reserve policy [5] [7].
Commentary:
The month of May continues the theme Higher for Longer. While inflation/headline CPI is decreasing, it is still trending well above the Federal Reserve’s target of 2%. Additionally, consumers (main street) are still feeling the pain at the pump, grocery store, and general overall cost of living.
With short term interest rates still outpacing long term rate, why would anyone take on a long-term bond when the short term bonds are so much higher yielding? There are several reasons to do this, but what is more interesting is the inverted yield curve of the 2- and 10-year treasury. This inversion has been an indicator of a looming recession for as long as I have been in the industry. Yet the stock market continues to climb higher and higher.
Additionally, banks continue to tighten lending and as of Q1 2024 marked eight straight quarters of tightening lending. Why does this matter? Let’s got back to our supply and demand charts from Econ 101.
If the demand for a good or service remain constant, and the supply decreases, the price of that good or service increases. The price of money or credit is the interest rate. More and more developers, businesses, are looking to alternative financing to meet their credit needs than ever before from any point in my career. In discussions with the developers that I know, they have been moving more and more to use their own money for development projects because it is taking so long to get credit from the banks they are just doing a project and scaling back their projects to fit within their cash budgets. Higher for Longer is affecting businesses in a variety of ways. When businesses are affected so are the average consumer on the street.
However, consumer confidence is accelerating. As people become more and more confident about their economic outlook, spending increases, their willingness to invest increases. Businesses are made up of people, and as people become more confident, their behavior reflects that confidence.
Hedgeye’s Director or Research Daryl Jones notes in a recent publication, “This morning’s May U.S. Consumer Confidence accelerated to +102, from 97.5 in the prior month. This was the first acceleration following three monthly declines. Interestingly, the Expectations Index, which is a gauge of consumers’ short term-outlook for income, business, and labor market conditions, rose to 74.6. This is up from the prior month of 68.8, though remained below which is typically the threshold for a recession of 80. Within the report, 12-month inflation expectations ticked up to +5.4% Y/Y from +5.3% Y/Y. In what could be a leading indicator for home purchases, purchasing plans in May were at the lowest level since August 2012.”
The lack of homebuying is a function of several factors, but being the lowest level in over a decade is very telling.
Conclusion:
Where do we go from here? There are several indicators that the economy is improving. Despite what some think the consensus of inflation is that it's cooling off and that while it may not reach the target level in the short term, the fact that it's cooling off means the Federal Reserve could cut rates later this year. The likely scenario will be sometime between August and October running up before the election, but who knows. A lot of it will depend on what happens with the economic data that comes out in July and August.
If the inflation continues to cool and the Federal Reserve does cut rates, this could create an opportunity in the middle to long term bonds to have a bit of price appreciation as we get the yield curve back to a normal yield curve.
Model Performance Update
Our Moderate model portfolio returned 1.67% during the Month of May and finished the month with a 5.81% return Year to Date (see chart below).
Changes to the model portfolio in May
- Remove BNDD, FJP, INFL, PSCE, SCJ,
- Add XLI, XLP, URA, JIRE, EWN, EWG
May 2024 performance with benchmark
May YTD return with benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one to one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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[1] https://www.investopedia.com/dow-jones-today-05312024-8656395
[2] https://www.reuters.com/markets/us/futures-slip-investors-brace-inflation-numbers-2024-05-31/
[3] https://apnews.com/article/market-stock-rates-china-inflation-0ed42442581985f017607ef0044afdd1
[4] https://www.wsj.com/livecoverage/stock-market-today-dow-jones-earnings-05-31-2024
[5] https://www.breckinridge.com/insights/details/may-2024-market-commentary/
https://www.lynalden.com/may-2024-newsletter/
https://www.cnbc.com/2024/05/23/treasury-yields-move-lower-on-fed-interest-rate-uncertainty.html
https://www.schwab.com/learn/story/corporate-bond-outlook
https://dynamicadvisorsolutions.com/bond-market-update-may-2024/