U.S. and international equities
The month of May proved to be mixed for the U.S. major market indexes. Last month’s top performer, the Nasdaq composite, was May’s laggard. International developed markets (MSCI EAFE) outperformed emerging markets (MSCI EM) last month as well.
Energy powers ahead
Energy completely reversed course with a very strong May after April’s showing as the worst performing sector. West Texas Intermediate’s (WTI) strong May performance helped drive the sector’s advance. WTI crude has more than doubled over the past year. Financials had a solid May, benefiting from healthy credit markets and an improving economic outlook.
Consumer discretionary, utilities, and information technology were this month’s laggards. Information technology equities pulled back as the economically-sensitive value stocks take center stage as the economy improves.
May’s fixed income results
The benchmark Bloomberg Barclays U.S. Aggregate Index finished the month marginally higher, as fixed income investors took solace in the Fed’s policy stance concerning inflation. Municipal high yield (Bloomberg Barclays High Yield Municipal index) performed well again in May. These bonds have been aided by municipal support in the fiscal stimulus package along with discussion of higher taxes. The Bloomberg Barclay High Yield Municipal Index has gained over 2% this year, making it the top performing fixed income sector year to date.
International bonds (FTSE World Government Bond Index) and emerging markets debt, measured by the JP Morgan Emerging Markets Bond Index (EMBI), ended higher in May as lower bond yields were not just limited to the US.
Commodities continued their run higher from April. For the second straight month, all major commodities were higher. Oil, natural gas, and gold all returned 6% in May. Prices for commodities have been driven by increased industrial and consumer demand as economies recover. In addition, market participants are hedging potential inflation risk through investing in commodities.
“Commodities had a good month,” explained LPL Financial Chief Market Strategist Ryan Detrick, “But don’t forget, the S&P 500 was green for the eighth out of the past nine years for the month of May.”
U.S. economic data recap
Inflation: Consumer prices increased again in April. The headline Consumer Price Index (CPI) annual rise was the largest since September 2008. One major reason for the increase was the base effect given the economic conditions due to COVID-19 last year. Removing volatile food and energy prices, the April core Consumer Price Index increased almost 1% from March and 3% from April 2020.
Producer prices in April increased more than expected, registering their largest annual increase ever. Year over year, the April PPI increased over 6%, while its month-over-month increase was 0.6%. April’s inflation showed to be quite substantial; however, we believe any inflationary pressure will ultimately prove transitory, especially given labor market slack.
U.S. consumer: The Conference Board’s Consumer Confidence Index surged again in April to its highest reading since February 2020. The Present Situations Index also soared in April.
The University of Michigan consumer sentiment survey for April increased almost 2%. This represents an over 20% year-over-year increase. The economic reopening efforts are credited for the increase in both measures.
Retail sales: Monthly retail sales have been quite volatile this year. In January, sales handily beat expectations as stimulus checks hit bank accounts, whereas in February, retail sales retreated from that high water mark. In March we witnessed retail sales rebound mightily, increasing almost 10% month over month.
April retail sales came in unchanged in comparison with March. Automobile and parts sales increased almost 3% where an available car shortage has driven prices higher. In addition, restaurant sales increased 3% month over month.
U.S. home sales: New home sales declined for the third straight month in April, as limited supply and record high prices seem to discourage prospective homebuyers. April existing home sales declined over 2.5% month over month. Even with a lack of demand, the median existing home price increased in April to its highest on record. Some real estate experts believe that the lack of housing supply could be contributing to the recent decline in home sales.
Small business sentiment: The National Federation of Independent Business (NFIB) Small Business Optimism Index increased in April. The optimism index has increased over the past three months. Over the past couple of months, the NFIB report has expressed concern about a tightening job market—44% of business owners reported unfillable job openings, which represents a record high. This, most likely, will cause additional upward pressure on wages and compensation.
Federal Reserve (Fed) news: On May 19 the Fed, in the meeting minutes from its April 28 meeting, stated that it may be appropriate to begin to consider tapering asset purchases if the economy continues to improve. This may be seen as a sign that the Fed sees both employment and inflation moving closer to reaching their targets.
Nevertheless, Fed Chairman Powell noted that the recovery currently remains “uneven and far from complete”. With regard to inflation, the Fed essentially took an assured view, noting that the short-term price pressures were transitory and would likely fade as the economy continues to recover. In addition, the Fed anticipated rising demand with the economic reopening, while supply-chain challenges may persist and cause further upward pressure on price levels.
U.S. employment: The U.S. unemployment rate has declined substantially from last year’s peak but is still well off full employment levels. COVID-19 continues to impact the recovery of service industry employment in particular. The continued distribution of COVID-19 vaccines, COVID-19 spread mitigation, and stimulus efforts should continue to help the labor market.
For quite some time, investors have been focused on COVID-19 cases and their effect on the economic reopening efforts. However, given the most recent inflation data, market participants will be focused more on inflation and its effect on the Fed, interest rates, the economy, and corporate profits. Strong earnings have been an important driver of this year’s strong stock market performance, however, markets are forward-looking. The ability for companies to successfully absorb higher input costs and pass them onto their consumers will play an important role in future earnings results.
The Fed, along with LPL Research, believes that inflation is transitory and will stabilize once the economy completes its reopening and supply chains are fully operational. As noted earlier, labor shortages could be a critical hurdle to overcome. To conclude, the major question that market participants want answered is how long the “transitory” period will last and what impact that may have on Fed policy, interest rates, economic growth, and corporate profits. This theme will most likely influence the rest of this year’s market performance.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All market and index data comes from FactSet and MarketWatch.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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This Research material was prepared by LPL Financial LLC.
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