May 2022 Stock Market Commentary

Global equities ended an eventful month roughly where they started, briefly touching bear market territory (defined as a -20% decline from peak to trough) before rallying into month-end.

In recent months, news headlines have kept US markets torn between the negative impact of elevated inflation and the possibility that the Fed will induce a recession while trying to bring inflation back down. The S&P 500, a benchmark for large cap US stocks, gained +0.2% in May and is down -12.8% on the year.

International equity markets added +0.7% this month for a -10.7% full-year return on the MSCI ACWI ex-US index. Within fixed income, the Barclays US Aggregate Bond Index posted its first positive monthly return since November, with the index gaining +0.6% (-8.9% year-to-date). The 10-year Treasury yield hit a new post-pandemic high of 3.1% this month before closing at 2.85%.

Gold prices gave back another -3.8% in May (+1.8% YTD), while broad-based commodities continue to prove an effective inflation hedge with the Bloomberg Commodity Index now up +33% for the year.

With talk of bear markets and recession risks dominating the headlines, we continue to lean on our data-driven Three Dials approach to navigate the current volatility. Our proprietary reading was unchanged during the month of May, as we summarize below:

1. Market Sentiment and Momentum: (Negative ❌)

Major equity indexes have hit new lows in four of the five months so far this year, as bearish sentiment among individual investors continues to drive the downward trend in markets.

Despite the strong rally in the second half of the month, our Momentum Dial remains in a Negative position.

2. Economic Fundamentals: (Positive ✔️)

Current data continues to suggest that US economic growth is slowing from post-pandemic highs but is still on a positive trajectory.

While recession risks have risen this year, the job market remains robust, both manufacturing and services sectors are still growing, and our Fundamental Dial remains in a Positive position.

3. Valuation: (Negative ❌)

According to FactSet, forward price-to-earnings ratios on the S&P have contracted from 21.3 at the end of 2021 to 17.1 at month-end, which accounts for all (and more) of the bear market decline in equities this year. Despite this steep contraction, forward P/E multiples remain above long-term averages, which leaves our Valuation Dial in a Negative position.

Our Three Dials composite reading remains Slightly Defensive, with two dials fully “off” and one still fully “on” as of the end of May. We continue to preach diversification and will communicate all future updates accordingly.

Sources: Morningstar, New York Fed, Factset, AAII, Treasury.gov, NPR, ISM World, Federal Reserve Bank,