May 2023 Stock Market Commentary
Ethan Pollard | June 06 2023
Markets were mixed during the month of May, with US stocks leading the way as tech companies surged on optimism around artificial intelligence.
The S&P 500, a broad benchmark for large cap US stocks, added +0.4% in May and has rallied +10% year-to-date, led by chip maker Nvidia becoming just the seventh U.S. company to achieve a trillion-dollar market cap.
Smaller companies continue to lag their blue chip counterparts, as the Russell 2000 index fell -0.9% on the month and is now at a small loss for the year.
Overseas equities reversed course in May after a strong start to the year, with the MSCI ACWI ex-US index dropping -3.6% for a +4.8% return YTD.
Within fixed income, the Barclays Aggregate Bond index fell -1.1% in May (+2.5% YTD), as rates moved higher on the possibility that the Fed may have at least one more interest rate hike left in the chamber after stronger than expected economic data.
Commodity prices continued to fall from their 2022 peak, with the Bloomberg Commodity index declining -5.6% last month for a -11.4% loss this year.
With equities continuing to show signs of technical resilience, we have one change in our Three Dials methodology, which we outline below:
- Market Sentiment and Momentum: (Positive ➕)
We have seen strength across all major equity indexes coming out of the lows reached during the fourth quarter of 2022, most notably within the S&P 500, where long-term moving averages have rallied off their 52-week lows. According to Bespoke Investment Group, the S&P boasts a positive 12-month return in all 20 previous occurrences, suggesting that the current rally has room to run. As such, we’re updating our Momentum Dial from Neutral to Positive.
- Economic Fundamentals: (Negative ❌)
While economic data continues to point toward a near-term slowdown, reasons for optimism have shown through, perhaps most importantly the now imminent deal between Congress and the White House to lift the debt ceiling and avoid a catastrophic default on US debt. Going forward, we’ll continue to weigh the effects of a strong labor market with languishing manufacturing data, but for now, our Economic Dial remains in a Negative position.
- Valuation: (Neutral ➖)
We are closely monitoring equity valuations, as the risk of overexuberance around high priced tech stocks could push broad market valuations to unsustainable levels. For now, corporate earnings have come in better than feared, keeping our Valuation Dial in a Neutral position for the time being.
With the tick up in our Momentum Dial, our composite Three Dials reading moves up from a Moderately Defensive position to a more Neutral reading overall. We now have one dial each in a Positive, Negative and Neutral position.
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