May always has us looking forward to summer
Paul Tarins, RICP®,WMCP®,CSRIC™
May always has us looking forward to summer, and just as it is a transitionary month for the seasons, so it was in the markets last month. Although it was an "everything higher" month for stocks and bonds alike, the overall tone was one of consolidation as markets digested their impressive first-quarter results. While the S&P 500 finished higher a solid +0.7% ('SPY' ETF Proxy*), the broader Russell 2000 (‘IWM’) index was up just +0.3%, and, while setting a record string of eight monthly advances, has really been flat and trading within a well-defined range established since mid-February. That said, we are still witnessing major rotations daily, with small and large caps, and growth and value stocks seemingly taking turns advancing and declining. At the same time, the future looking VIX options volatility index has remained well-contained below the 20-mark. It is the type of environment that calls for remaining invested for the small daily gains that typically add-up by month-end. Finally, overseas issues performed especially well in May, supported by a slightly weaker US Dollar.
On the fixed income spectrum, we encouragingly noted that the dramatic rise in rates seen earlier in the year inspired by overheated growth and inflation fears leveled off, with ten-year US treasuries closing in the 1.6% handle. Indeed, the Barclay’s Aggregate Bond Index ('AGG') closed +0.2% in May. All that said, the real winner for the moth was Commodities ('DBC'), up about +3.9%. It has been a stellar year for Commodities after several back-to-back losing years, now some +26.5% higher for the year. And herein lies the biggest question of 2021 five months in: does this indicate a regime change towards higher inflation, or is this a transitory feature of the economy reopening after the Covid pandemic shutdown?
As to this question, the Federal Reserve continues to see it as temporary (CNBC, "Federal Reserve: Inflation’s rise because of transitory factors", 5/19/21). Last month's poor jobs report seems to support this notion. While commodity prices are subject to volatility, once wages rise, those increases tend to be stickier. Continue to expect hyper-vigilance on the part of markets on the topics of wage and inflation data ahead. To be frank, economic reports will likely add a good deal of noise in the months ahead. Why? In as much as the economy has by-and-large made a terrific recovery, the largest increases are likely behind us as we reach the later innings of renormalization. Both economic and earnings reports may have a difficult time continuing the stellar pace of their initial recovery going forward. There will also undoubtedly be lingering uncertainty for the time being about the status of proposed infrastructure stimulus and tax proposals as they work their way through their respective legislative processes.
On top of these possible headwinds and back to our transitionary theme for the month of May, many of you may have heard of the "Sell in May and Go Away" trope. Although summer months are typically net positive and worth holding through, it is true that the average gains are often more muted and volatility can pick up on lighter trading volume, supporting the summer doldrums concept at the heart of the phrase. Whatever markets bring our way, be assured we are closely monitoring markets, the economy, and your accounts to help you realize your long-term investing goals.
* Based on time-series data from CSI Data, Inc. Data deemed reliable, but not guaranteed. Past performance is no guarantee of future performance or profitability.
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.