May 2022 Monthly Review
While May remained tumultuous in both equity and fixed income markets, the “falling knife” took a pause last month. Equity markets ended mixed after some important messages during earnings season. Bond markets managed to rebound despite a rate hike, hawkish messages from the FOMC, and a continuous stream of elevated inflationary pressures.
Equity markets found a late May rally to finish just slightly positive. The Dow Jones industrial average led the way +0.33% in May. That managed to keep the S&P slightly positive at +0.18%, while the Nasdaq continued to falter -1.93%. The energy sector continued to lead the way, up over 15% for the month. Consumer staples, consumer discretionary, and real estate all lagged and fell about 5%.
Bonds managed to stabilize last month. The 10-Year US Treasury benchmark hovered around 3% at the beginning of the month but ended the month 15 basis points lower at 2.85%. Investment grade sectors also followed suit as corporate bond prices rose, and municipal bonds staged the largest monthly rally since 2020.
Despite the Fed-tightening environment, bonds reverted to the “old” negative stock/bond correlation. Bond prices moved higher on days the stock market saw heavy re-pricing. Some of the interest in bonds came from the higher absolute level in interest rates versus cash, and some has come from predictions of a future recession.
On May 4th the FOMC decided to raise rates by 50 basis points (to a 1.00% Fed Funds rate) as they also announced the reduction of their balance sheet to begin in June. All of this was widely anticipated by the markets, but some investors were worried about a stronger increase. As Chairman Powell dismissed the near-term notion of a 75-basis point hike, both stock and bond markets rallied sharply. The very next trading day, markets reversed course as investors realized the Fed has a lot more work to do to dampen rising inflation.
The war in Ukraine continues to be on the minds of investors, and now, the rising tension between China and Taiwan. The US stance on both topics continues to hamper markets. On May 9th, investors braced for a strong “WW3-like" message from Putin, during his May Day speech. The tone was defiant but much softer than the markets were anticipating.
Economic data continued to come in strong, led by employment data. As job reports continue to show two jobs for every person unemployed, the “post-Fed” non-farm payroll figure came in healthy for April at 428k jobs, and the unemployment rate remained at 3.6%. Retail sales, the service sector, and manufacturing all reported solid monthly figures. Although, consumer confidence data, along with housing data has started to slip. Logically both higher rates and inflation have already begun to filter into this data, despite a strong economy. Both CPI and PPI remain elevated, along with unit labor costs for the first quarter.
As mid-month approached, bond markets felt more range-bound, and stocks seemed to find some solid footing. On May 17th, Walmart released earnings, and the disappointing news started a firestorm in equity markets. Wal-Mart stated that the first quarter was a result of higher product, supply chain, and employee costs, and the results were disappointing. Target followed suit the following day and its stock fell as much as 25%. Absorbing higher costs hurt profitability. This created a sharp “risk-off” week for markets and a run for cover in safe-haven bonds. Markets calmed as the month moved on, and as Fed speakers reiterated their goal of dampening inflation at all costs.
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