May Market Review
The market narrative in May transitioned to a debate on whether we are looking at recession or repricing debate; both nine letters, both look kind of similar, but are fundamentally very different beasts. In the end, May added to the 2022 legacy of heightened equity market volatility, geopolitical uncertainty, and sizable monetary policy influence. As expected, the Fed raised its policy rate 50 basis points in May and underscored its desire for similar 50 bp hikes over the next two meetings with the intent to keep tightening financial conditions until clear and convincing data of slowing inflation emerges. They are certainly not alone in their intent to eliminate emergency levels of policy accommodation with the ECB, BoE, and many other central banks moving the same direction. From a fundamental perspective, corporate profit growth is reverting to sustainable levels, inflation is running persistently high, the job market remains very healthy, and overall service and manufacturing sector activity is expanding. Overall, it’s been a very challenging year with markets on pace for record levels of volatility and virtually all financial assets (stocks and bonds) struggling. U.S. and most international equity markets flirted with bear market territory mid-month before recovering over 8% in the final six trading days. May saw continued dispersion within global equity markets with some areas doing particularly well (value, small caps, international developed markets, Latin American, and energy stocks) and some not so much (growth stocks, REITs, Eastern Europe). While the S&P 500 notched a 0.2% gain on the month, year to date it is down 12.8%, international stocks are down 11.3% (-4.9% in local currency terms), and emerging markets are 11.7% lower. May did break a streak of five consecutive down months in the bond market, returning 0.6%, but still have not provided much shelter with broad U.S. bonds down approximately 9%, non-U.S. bonds -14.5%, municipal bonds losing 7.5%, and high yield bonds off 8% year to date – numbers which place 2022, through May, as the worst performing bond market on record with data going back to the early 1970’s. Commodity markets continued their advance with a 1.5% in May thanks to the energy complex (+10.4%) continuing its rally on the back of Russian-Ukraine global supply concerns while industrial metals lost ground on global growth slowdown concerns.
Market Anecdotes
- Aggregate S&P 500 EPS (12mo) of $134.90 is sitting at a record high and has increased 7% YTD priced at trailing and forward P/E multiples of 20.6x and 18.3x respectively. BCA Research made note that the 140bps rise in yields this year coincides with a 22% decline in forward P/E ratios.
- Earnings, dividends, and multiple expansion/contraction are the drivers of stock market returns and the latter has both giveth (2020-2021) and taketh (2022) in grand fashion in recent years. • The headwind of high and rising bond yields has relented recently giving higher P/E stocks some breathing room and increasing the number of modestly priced stocks, particularly in non-U.S. markets.
- Q1 GDP revision, from -1.4% to -1.5%, came with a strong upward revision to personal consumption spending which was offset by lower private inventory investments. Growth of 3.9% and an upward trend in sales to domestic purchasers signals healthy GDP for Q2.
- Robust consumer balance sheets (demand) support a constructive view of forward growth expectations with $4t in checking and loose currency and $4.5t in money market holdings.
- BCA pointed out the slowdown in their Global Leading Economic Index confirms slowing global growth momentum, but the diffusion index appears to have bottomed and is shifting higher.
- While the U.S. housing market has cooled in step with a 2% rise in mortgage rates, it doesn’t give us the sense of any looming issues. Affordability measures and mortgage rate spread to Treasuries provides an encouraging perspective when viewed long term.
- EU oil embargo details were released early last week, sending tremors through energy markets, but OPEC later surprised investors with an unexpected production increase to 648,000bpd in July and another increase in August which essentially restores all pandemic related production cuts.
- China’s weak housing market, zero tolerance Covid policy, and weakening global manufacturing demand has begun to influence policy with the PBoC lowering its 5yr loan rate by 15bps following a rate cut in the mortgage market in May.
