Rates Up, Dollar Down, Stocks Flat

Much of May was dominated by debate over raising the debt ceiling and the so-called “X-date” when the U.S. Treasury would no longer have enough cash to pay the country’s bills. Kabuki or not, the cost of insuring against a potential default was, for a time, more expensive than it was for multiple emerging market countries, including Greece, Mexico, and Brazil, all serial defaulters (Bloomberg, May 10). It was not a good look.

Behind the scenes, the familiar economic issues continued to play out. The Federal Reserve raised rates for the tenth consecutive time at its May 3^rd meeting, lifting the federal funds rate to a range of 5.0%-5.25%, a 16-year high (Wall Street Journal, May 4). This rate hike was generally expected, as was its signaling of a potential pause at future FOMC meetings.

Employment remained robust, with 259,000 jobs added in April (Wall Street Journal, May 5). That news was greeted warmly by a stock market that has run hot and cold on job growth. On the day, the S&P 500 jumped 1.85%, the Dow rose 1.65%, and the Nasdaq was up 2.25%. The yield on the 10-year Treasury climbed to 3.445% from 3.35% (Wall Street Journal, May 5).

Banking industry troubles moved slowly towards a conclusion as a struggling First Republic Bank was seized and sold to JPMorgan, marking the second-biggest bank failure in U.S. history (Wall Street Journal, May 1). In announcing the takeover, JP Morgan CEO Jamie Dimon declared, “This part of the crisis is over.” The market had other ideas, however, and regional bank stocks continued to trend sharply lower. For the week ended May 5 the KBW Nasdaq Regional Banking Index dropped about -8.0% and the S&P Regional Banks Select Industry Index, fell about -10%. This in spite of a sharp Friday rally of over 6% that lifted the sector off its lows (Wall Street Journal, May 5).

While the S&P 500 was mostly flat for the month, this masked a sharp rally in the technology sector powered initially by strong earnings from tech bellwethers Apple, Google, Meta, and Microsoft. On the year through the end of May, the S&P was up about 12.0% but would have been negative without the returns from seven big tech companies, according to S&P Dow Jones Indices (Wall Street Journal, June 4). But it was the frenzied interest in emerging artificial intelligence (AI) technologies that really drove the market, as captured by the performance of chip maker NVIDIA (Seeking Alpha, May 31). Shares in the company soared 24% on May 25^th after an earnings beat, with its market cap closing in on $1 trillion (CNBC, May 25).

April inflation data was somewhat mixed. The Consumer Price Index (CPI) was up 4.9% year over year, the first sub-five percent reading in two years, as reported by Bloomberg (Bloomberg, May 10). The personal consumption expenditures (PCE) index rose slightly more than expected, up 4.4% for the 12 months ended April, compared to 4.2% for March (CNBC, May 26). Retail sales climbed for the first time in three months in April, up 0.4% from the prior month (Wall Street Journal, May 16). The dollar rallied slightly in May but remained well below September’s peak (Wall Street Journal).

A mid-month survey from Bank of America found that both institutions and individuals continued to pull money from the market, spooked possibly by rising interest rates and the banking troubles, as well as the looming debt crisis. S&P Global Market Intelligence data found that institutions had yanked $333.9 billion from stocks over the previous 12 months, while individuals withdrew another $28 billion (Wall Street Journal, May 14).

For some, this negativity was seen as a contrarian indicator. Bulls could further point to corporate profit margins that have begun to stabilize, according to FactSet (Wall Street Journal, May 4), and stocks did in fact rally impressively in the first few days of June.

China slows

Outside the U.S., China was the big story as the world’s second-largest economy continued to struggle, and youth unemployment there hit record highs (Wall Street Journal, May 16). Data for retail sales, factory production, and fixed asset investment all fell short of expectations, as reported by the WSJ. Property sector investment also declined.

The latter point was one shared with the U.S., where commercial real estate also struggled, with prices falling for the first time since 2011, according to Moody’s Analytics (Bloomberg, May 17). Lending conditions in the U.S. generally continued to tighten, providing support to those who argued a recession is coming (Wall Street Journal, May 31). Other evidence – including a huge beat on May jobs, announced as this post was going to press (339,000 positions added against expectations for 190,000) – suggested otherwise (CNBC, June 2). For now, the debate continues.