Paul Tarins, RICP®,WMCP®,CSRIC™
Markets in Review for May 2022
Stocks finished fractionally higher in May, but it was a rocky road getting there. Investors continued to worry about slowing economic growth, inflation, and rising interest rates. Markets recorded the worst start to a year since the late 1930s, as well as one of the longest weekly losing streaks in over twenty-years. At one point during the month, the S&P 500 broke into “official bear market” territory on an intra-day basis. However, the index recovered late in the month on potential signs of peaking inflation and the reopening of manufacturing districts in China after an extended Covid lockdown.
As shown below, foreign stocks (‘EFA’ ETF Proxy +2.0%) outperformed US large caps (‘SPY’ +0.2%), primarily on a weaker US Dollar. High yield bonds (‘HYG’ +1.6%) performed especially well, with broader fixed income securities also closing in the green excepting long-term treasuries (‘TLT’ -2.3%), which are the worst performing asset of the year. In contrast, commodities continued to rise, up +4.6% (‘DBC’) for the month with a Russian oil embargo serving as the latest catalyst driving the move alongside persistent supply chain disruptions.
Global Asset Class Returns May & Year-to-Date 2022
On the economic front, concerns over slowing growth ahead are on the rise. Existing home sales have fallen three straight months on unaffordable prices and headwinds from rising interest rates. The most recent ISM Services reading also came in below expectations. Although there was an early sign of inflation slowing after consumer prices rising +8.3% in April versus +8.5% the prior month (MoneyWise, "3 top dividend stocks...", 05.17.22), a peak is too early to call, in our judgement. Despite robust earnings overall, concerns over future cost cutting to preserve margin are growing. Sensitivity to earnings misses were certainly evident mid-month when disappointment among retailers on rising inventory levels preceded significant volatility. Finally, anecdotal statements about slowing growth from high profile CEOs, such as JPMorgan Chase's Jamie Dimon and Tesla's Elon Musk, are also feeding into the sour mood.
Recently there has been significant day-to-day choppiness according to how daily news flow is perceived as affecting future Federal Reserve policy. Intermediate treasury yields near 3.0% now exceed the average S&P 500 company dividend, changing the multi-year calculus among asset classes. While rates have settled into a volatile range, we will be watching the impact of the first Federal Reserve balance sheet reductions carefully in the month ahead.
Finally, although major stock indices appear to have found near-term technical support, we believe markets will require further evidence of peak inflation, reengagement of supply chains, or progress on the Ukraine/Russian war front to serve as a longer lasting catalyst for a recovery. A pause in Federal Reserve rate increases in the early fall could also serve this purpose for a late-year recovery. Until that time, we are closely monitoring client accounts during this volatile period.
Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.