Markets flailed in May, seeking certainty amid conflicting signals.
The churn of now-familiar currents produced a May seemingly driven by headlines as the S&P 500 closed more than 1% up or down eight times on the news of the day. At different moments, inflation and the U.S. Federal Reserve’s response to it, China and COVID-19, rising food and energy prices, and the Russia-Ukraine War provided varying guidance to a market eager for direction.
At the end of May, however, the equity markets rallied, pulling the S&P 500 from a bear-like slump to close down 0.56% for the month. That rally could signal investors’ emerging hope that the Fed can engineer a soft landing on its inflation-fighting plan: raising interest rates without quashing the potential for growth.
Still, expect inflation to be the dominant concern as we continue into the summer. In May, home prices rose to record prices, gasoline prices remained elevated and durable goods prices increased for the sixth time in seven months. Consumer sentiment is at the lowest level since 2011. There is good news: For the first time since last June, next-year inflation expectations are lower. Similarly, both housing and the price of durable goods are starting to plateau.
"Other good news is that bonds started to behave the way they should, providing an offset to equity risk," Raymond James Chief Investment Officer Larry Adam said.
Bond volatility remained elevated in May with the ten-year Treasury trading in an intra-month range of 2.72% to 3.21%. However, concerns about economic growth caused yields across the maturity spectrum to fall, with 2-year and 10-year yields declining to 2.55% and 2.86% respectively. Compare that to May 2021, when the yield on the ten-year Treasury was only 1.58%. The rally in ten-year Treasuries in May marks the first positive month of performance since November 2021.
Performance reflects price returns as of market close on May 31, 2022. For the MSCI EAFE and Bloomberg Aggregate Bond indices, values reflect May 27 closing prices.