May 2021 Stock Market Commentary

Global equities advanced in May for the fourth consecutive month as the world economic recovery continues to take shape. The S&P 500, a benchmark for large cap US stocks, rallied +0.7% on the month for a gain of +12.6% year-to-date.

Small- and mid-cap stocks tacked on another 0.2% gain in May per the Russell 2000 index, which is up +15.3% this year. Overseas equities advanced +3.1% this month, with the MSCI ACWI ex-US index now up +9.9% on the year. Fixed income markets continue to show signs of healing as interest rates have stabilized for the time being. The Barclays US Aggregate Bond Index rallied +0.3% in May for a -2.3% return YTD. Gold prices also recovered from Q1 losses, adding +7.5% on the month to climb back into positive territory (+0.7% YTD).

Below we review each of our “Three Dials”, where we distill the month’s headlines and data points into three primary indicators, each of which were unchanged in May:

1. Market Sentiment and Momentum: Positive

2021 has seen an inflection point for equity growth after recovering from the COVID fallout. Outside of emerging economies, many of which have struggled with containing the pandemic, major equity indexes have held tight to upward trend lines for the first five months of the year. On balance, our Momentum Dial remains in a “Positive” position.

2. Economic Fundamentals: Positive

Consensus estimates for US GDP growth continue to improve, with economists forecasting +9% annualized growth in Q2 and full-year growth to exceed 6% for 2021. Overseas economic activity has also picked up, notably in Europe where leading indicators turned positive for the first time since the pandemic. We believe we are in the early stages of a global economic expansion, and thus our Fundamental Dial shows a “Positive” reading.

1. 3. Valuation: Negative 

Valuation remains a moderating force, particularly amongst the high-priced growth stocks, which have underperformed this year as worries about higher inflation could lead to a price correction. While many view these lofty valuations as sustainable, we recognize the risk they present, which is why our Valuation Dial sits a “Negative” position at present.

On balance, our Three Dials composite reading continues to take a “Cautiously Optimistic” view, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.

Sources:

https://www.morningstar.com/

https://www.wsj.com/articles/covids-next-challenge-the-growing-divide-between-rich-and-poor-economies-11621343332

https://www.atlantafed.org/cqer/research/gdpnow

https://www.conference-board.org/data/bcicountry.cfm?cid=10

https://www.bloomberg.com/news/articles/2021-05-13/wall-street-can-t-agree-if-inflation-is-good-or-bad-for-stocks

https://www.cnbc.com/2021/05/30/goldman-sees-higher-than-normal-valuations-lasting-a-while-solid-returns-for-stocks-through-2024.html