Monthly Market Update - May 2024


  • Stubborn inflation and a resilient economy had shifted speculation to one, two, or maybe zero cuts in 2024.
  • Uncertainty weighed on stock and bond valuations in April. The S&P 500 Index ended the month down -4.2%, bringing the year-to-date return to 5.6%.
  • Attention shifted to earnings sustainability amidst historically high valuations, with positive earnings reports surpassing expectations, particularly in the Technology sector.
  • Concerns arise over the resilience of consumer spending, particularly among low-income consumers, despite overall strength in the job market.

If the best remembered phrase from long-serving Federal Reserve Chair Alan Greenspan is "irrational exuberance," then current Chairman Jerome Powell's may well be "data dependent." Powell's obsession has become the market's. This past April was another in many months of seesawing sentiment over the state of inflation and the state of the economy and their effects on Federal Reserve policy. Early this year, optimism over falling inflation produced widespread belief that interest rate cuts would be dropping as frequently as Caitlin Clark's threes. By the end of April, stubborn inflation and a resilient economy had shifted speculation to one, two, or maybe just zero cuts in 2024. Worriers went so far as to postulate another rate increase, a possibility Chairman Powell brushed off, to the market's relief, in his May 1 statements.

All of this uncertainty was a drag on stock and bond valuations in April. From top to bottom, the S&P 500 Index flirted with a -6% drop but rallied to end the month down -4.2%, bringing the year-to-date return to 5.6%. Interest rates worked higher, chipping away at bond valuations. The bellwether 10-Year Treasury began the month at 4.2% and ended nipping at 4.7%. Small and midcap stocks, which are more interest-rate sensitive, trailed larger stocks. And among larger stocks, the most dramatic earnings continued to be concentrated in mega-cap technology.

With the growing recognition that the stock market is not going to have the tailwinds of reliable rate cuts, attention has shifted to earnings sustainability. This is particularly pointed since valuations are historically high. The evidence by month end was generally positive with more than half of the S&P 500's market cap reported. Earnings were beating expectations by 8.4%, well above the historic average of 4.8%. Forward projections show a continuation of the overall trend with some significant gaps between the market-leading Technology sector and trailing sectors Materials and Energy.

As we've warned in the past, the buoyant economy's reliance on a resilient consumer may be fraying, particularly at the low end. While the job market continues to show strength, consumer confidence has recently dipped, and this has been showing up in sales at some of the nation's largest discount retailers. Meanwhile, middle- and high-income consumers appear to be in good shape. This is particularly clear in the housing market, where sales of expensive homes, often purchased on a cash basis, are outpacing more moderate-priced housing, where high mortgage rates are suppressing turnover and sales.

Looking forward, the best chance for Federal Reserve action appears to be September, after which we anticipate the traditional pause for the election season. While recent inflation prints have caused some consternation, we think the revival of the 1970s term "stagflation" is overblown. The prospect of high and rising inflation in conjunction with a recessionary economy is extremely rare and requires extenuating circumstances. Yes, inflation is sticky, and getting the personal consumption expenditure (PCE) inflation rate down from 2.8% to the targeted 2.0% may be difficult, but the slowing GDP reading for the first quarter suggests that inflationary pressures should eventually abate.

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