May 2021 may be remembered as the “great unmasking” in the U.S. Markets continued to grind higher thanks to abundant liquidity, while a more stable interest rate environment ensued. The “re-opening trade” was in favor, despite some lower than expected levels of economic growth.
Equities moved higher during the month, the S&P 500 Index notched a solid 0.70% gain lead by financials, industrials, and value. The Nasdaq Index fell by 1.44%, as the Dow Jones Industrial Average rose 2.21% as the value over growth theme continues in 2021. General risk assets continue to elevate, high beta sectors such as small-cap equities, high yield, and emerging market bonds all had standout performance during the month.
Despite a clear “re-opening rejoice” in the US, economic data suggested a less robust path. May non-farm new payrolls disappointed reporting 266,000 vs estimates that were expected to top one million. In addition, retail sales and home sales data moderated in April.
Inflation data, on the other hand, remained very strong. Inflation indicators such as ISM prices paid index, average hourly earnings index, CPI, and PPI were all stronger than the economist expectations last month. In addition the first-quarter core PCE index, a FOMC focus, ticked up to 2.5%. Possibly more important to markets were all the anecdotal data from analysts and companies reporting rising prices. This core theme for 2021, has investors climbing “walls of worry”, despite a coordinated message from Fed officials.
The minutes of the most recent FOMC meeting showed the Fed’s steady position that inflation would be transitory and inflationary pressure will subside over time. A small pivot in language stated, “It might be appropriate at some point in upcoming meetings to begin plans for discussing a plan for adjusting the pace of asset purchases”. While the comment was quite benign, it seemed to drive macro markets in late May.
Traditional inflation-focused rotations like gold and oil were up over 7% and 4% respectively. In contrast, cryptocurrency, which has been suggested to become “the new inflation hedge” had a very sharp reversal and dominated headlines (Bitcoin fell over 35%).
Fixed income markets saw a second month of positive performance, somewhat recovering from the big rate move that occurred in Q1. Treasuries managed to record a small gain in May after a roller coaster ride within the month. The US 10-year Treasury saw a low yield of 1.464% after a disappointing jobs report on May 7th. Less than one week later, yields rose to 1.704% after CPI inflation data reported the biggest increase in years. Despite early volatility, the US 10-year ended the month at 1.594%, closer to the lower end of recent ranges
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