Market Monitor: May Update
Headlines and Highlights
- Congress passes debt-ceiling bill, avoiding default: The U.S. Senate voted 63-36 in favor of the debt-ceiling bill on Thursday night, sending the measure to President Joe Biden to be signed into law on Friday. The deal, which has drawn criticism from conservative Republicans and liberal Democrats, calls for modest spending cuts and other steps aimed at ensuring House Republicans’ approval. The Fiscal Responsibility Act averts an unprecedented U.S. default that would have occurred on June 5th when Treasury Secretary Janet Yellen says the government would run out of money to pay its bills on time.
- Strong jobs report and stubborn inflation muddies water: A larger than expected increase in non-farm payroll employment in May coupled with inflation reaccelerating last month keeps on the table the possibility of another rate hike this year. The U.S. economy gained 339,000 jobs last month versus an expected 190,000 while the core Personal Consumption Expenditures index climbed to 4.7% over the past 12 months from 4.6%. Fed Chair Jerome Powell hinted last month that a pause in the central bank’s rate-hike cycle is likely at its mid-June meeting. But several Fed officials have publicly advocated for further tightening, raising the possibility of an increase in July if not June.
- Tech giants boost markets in May: Technology mega-stocks lifted U.S. equity benchmarks higher last month despite pressure from the debt-ceiling stand-off and speculation about additional rate increases. The S&P 500 ended May up 9.6% for the year thanks to double-digit gains for a handful of the largest stocks, including Alphabet, Amazon, Tesla and Nvidia. The 10 biggest stocks, mostly tech, are up around 44% in 2023; without them the S&P 500 would be essentially flat. Other major benchmarks had down months. Bonds fell as yields, which move inversely to prices, rose sharply on fading debt-ceiling concerns, hawkish talk by Fed officials and mostly solid economic data.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- The robust jobs report in May continues to reflect strength in the U.S. economy but was more mixed than the headlines suggest, as the unemployment rate rose more than expected from 3.4% to 3.7%. Importantly, average hourly earnings rose 0.3%, roughly in line with expectations, which should assuage fears that wage growth would continue to fuel sticky inflation.
- A pause by the Federal Reserve this month in its rate-hike cycle would be a welcome development for the economy and markets. While the economy has held up remarkably well as the federal funds rate has risen from zero to 5% in 14 months, any further rate increases would further strain companies and consumers.
- We expect inflation to quickly resume its downward path after moving higher in May, as we previously stated its decline was unlikely to be linear. While housing, used cars and financial services all heated up last month, prices in most other categories continued to moderate and some fell. Leading indicators not yet reflected in the PCE index still point to the potential for a meaningful decline in inflation by year-end.
- A recession remains possible this year, but we believe the risk has receded somewhat based on recent data, including a report (S&P Global’s US Composite PMI) showing the U.S. economy growing – albeit still modestly – at the fastest pace in 13 months. The Atlanta Fed projects second-quarter growth of 1.9%, which would signify a fourth consecutive quarter of growth since the contraction in the first half of 2022.
- The banking industry appears to have largely recovered following the regional bank collapses that rattled the sector and markets in March. There is no immediate contagion risk evident with withdrawals back to normal levels and regional bank stocks on the upswing. Regional banks still could be in for some more trouble due to their commercial real estate exposure, but we think the pain for most banks will be manageable.
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