Stock market volatility continued during the month of May, as sustained concerns related to inflation, geopolitical events, and lockdowns in China disrupted markets. The S&P 500 finished the month up 0.2%, but at one point dropped as much as -7.8% intramonth. Volatility has been so persistent that the S&P 500 has experienced a 1% cumulative daily move for 28 straight trading days, a feat only seen a handful of times over the last 40 years (Strategas). Needless to say, May felt like a rollercoaster ride.
During May, a variety of events influenced the market in positive and negative ways. On the positive side, interest rates dropped slightly, with the 10-Year U.S. Treasury yield dipping below 3.0%. This followed a four-month period in which interest rates doubled from previous levels. Subsequently, bonds rallied, and the Barcap Intermediate Government/Credit Index gained nearly 1%. In addition, inflation showed signs of peaking, with the U.S. Bureau of Labor Statistics reporting consumer prices easing from an 8.5% annual growth rate in April to an 8.3% rate in May. While inflation is still much too high, signs of moderation in home buying, used auto prices, and Chinese COVID lockdowns are steps in the right direction.
Energy costs were the market’s main concern during May, with key commodities continuing to rise in price. Oil (WTI Crude) and natural gas (U.S. Henry Hub) are up 92% and 173%, respectively, over the last year. This has been caused by years of under-investment in production, post-COVID economic reopening, and the conflict between Ukraine and energy-rich Russia. While the Energy sector has benefited from these circumstances (up 17.7% in May), consumers are struggling with elevated costs. Consumer-focused sectors including Consumer Staples, Consumer Discretionary, and Real Estate all declined around -5.0% during the month.
As we move into the unofficial start of summer, we will likely see a continuation of the above themes. Despite some very modest signs of inflation easing, the Federal Reserve will continue to aggressively raise interest rates in an attempt to meaningfully dent inflation. This will cause a continued moderation in economic growth, and will likely keep the market on edge. With uncertainty heightened, expect the cadence of sharp market rallies and pullbacks to persist. Timing each sudden movement is ill-advised, and we will continue to invest in high-quality, well-established companies that have experience managing through a variety of economic conditions.
Thank you and as always, please feel free to contact us with questions or concerns.