Market Monitor: May Update
Headlines and Highlights
- Global recovery ahead of schedule: The world economy is bouncing back faster than expected thanks to widespread inoculation and U.S. fiscal stimulus, according to the Paris-based Organization for Economic Cooperation and Development. The shortage of vaccines in developing nations poses a worrisome threat, however, and could lead to new virus variants and renewed lockdowns. The OECD said the recent rise in inflation is not permanent and will likely tail off over the next six months.
- Fed raises issue of future tapering: Federal Reserve officials said they may soon discuss the possibility of slowing the pace of their massive bond-buying campaign, emphasizing that there are no plans to ease back their supportive policies any time soon. The comments came after the inflation measure watched most closely by the Fed (core PCE) posted its biggest year-on-year jump since the 1990s in April, rising 3.1% from a year earlier. The post-recession growth surge that has heated up the U.S. economy this spring is prompting the Fed to keep an eye on the inflation data in order to ensure that prices are contained.
- International stocks outperform in strong month: Stocks in developed international countries outgained their domestic peers in May for the first time in five months, helped by Europe’s accelerating reopening and brightening COVID-19 outlook. The benchmark for developed stocks in Europe, Australasia and the Far East outgained the S&P 500 by nearly 3 percentage points with a 3.5% gain, its best monthly return since December.
Select Market Returns
Sources: Morningstar, Altair Advisers
- The increase in U.S. prices this spring was to be expected amid the swift recovery from COVID-19 and the fastest snapback in the economy in decades. While a higher level of inflation can be anticipated in the months ahead, it should not rise excessively and is not likely to persist beyond the end of this year. Prices of goods and services should stabilize as supply-chain bottlenecks are addressed and fiscal stimulus benefits expire by year’s end.
- A steady flow of strong economic reports continues to bolster markets and we expect this trend of positive data to continue as the jobs outlook improves and stimulus continues. Job growth, jobless claims, manufacturing activity and business capital expenditures, among other areas, all have shown momentum lately, and second-quarter U.S. GDP growth is running at an estimated annual pace of 7.3%, according to the Atlanta and New York Federal Reserve Banks.
- The near-term threat to markets and the economy posed by COVID-19 has rapidly receded with a majority of the U.S. population and an increasing percentage of the rest of the world having been vaccinated. The risk is likely to rise again later this year, however, with medical experts warning of the possibility of another surge in cases next winter because of the spread of variants and a decline in mask-wearing and social distancing.
- The yield on the 10-year U.S. Treasury note, whose sharp rise earlier this year put pressure on stock prices, has held steady at around 1.6% since March. Yields may rise somewhat higher this year as the economic recovery proceeds but we expect them to remain range-bound.
- The likelihood of tax increases from President Biden’s budget could cause some volatility for stocks in the months ahead. We do not expect an end to the bull market, however, given all the fiscal stimulus and monetary support that the government has pledged to continue. The market already has assumed that any tax increases will be less dramatic than originally feared.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice