For the period May 1 – May 31, 2024.

Executive Summary

Equity markets rebounded in May as first-quarter earnings surpassed expectations. Despite strength in the corporate sector, weaker consumer spending and the overall moderating pace of growth suggest that inflation pressures will gradually subside.

What Piqued Our Interest

Economic growth and inflation remain the focal points across markets, much as they have for all of 2024. On the inflation front, we saw the April Consumer Price Index (CPI) report, and for the first time this year, the number did not surpass expectations to the upside. Headline CPI increased 0.3% in April after rising 0.4% in March on a month-over-month basis. The headline year-on-year rate moderated to 3.4% from 3.5% the month before, and the composition of the report was encouraging as the primary rent gauge recorded a 31-month low, and we witnessed declines in both new and used car prices.

On the economic growth side of the equation, April’s GDP report provided the big surprise, with first-quarter GDP showing growth of only 1.6%—a significant slowdown from the prior quarter’s 3.4%. At the end of May, we received the first revision to this initial GDP number, and it was revised down to 1.3%, indicating that growth is moderating more than anticipated.

Amidst this backdrop, first-quarter earnings season concluded and companies within the index collectively grew earnings at 6%, easily beating the expectation of 3% growth at the start of earnings season. In fact, 78% of S&P 500 companies exceeded earnings estimates during this time. Sectors such as Technology and Communication Services continue to have high growth rates, and Artificial Intelligence continues to be a theme, with 41% of companies in the S&P 500 mentioning AI during conference calls (up from 23% a year ago). However, we also saw some commentary from Consumer Discretionary companies that noted shifts in consumer behavior as many seek value within an environment of high prices.

Consumers vote with their wallets, and we also saw overall retail sales from the U.S. Census Bureau that were weaker than expected. Retail sales excluding autos and gas declined -0.1% month-on-month, suggesting a broadening of the weakness across consumer spending categories as higher prices have consumers pulling back on overall spending. There is a delicate balance within the economy as slower spending can weigh on economic growth, but it can also help ease the pressure on inflation. As demand wanes, the ability for companies to price goods and services at ever-higher price points diminishes.

The single biggest driver of consumer spending is compensation, a function of employment, wages, and hours worked. Compensation constitutes over 60% of personal income, and it is why each labor report, along with weekly jobless claims, are important data points.

We often think back to the 1970s as an analog to our current situation of stubborn inflation, but in the mid-1960s, inflation accelerated from 1% to 3%, prompting the Fed to tighten aggressively in 1966. This led to a 22% decline in the S&P 500 in 1966 as real GDP growth slowed from 9% to 2.5%, but unemployment ticked up just slightly from 3.6% to 4.0%. When the Fed began easing interest rates with this backdrop of low unemployment and softer-but-still-positive GDP growth, compensation increased, spending and GDP grew, and inflation returned. Avoiding a second wave of inflation in this post-Covid era may imply that the Fed will take a more cautious and gradual approach to cutting interest rates, keeping the markets guessing as to when the Fed will begin to cut rates.

Market Recap

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After five straight weeks of gains, the S&P 500 pulled back during the last week of May, but it gained almost 5% for the month. Growth-oriented indices such as the Nasdaq 100 and the Russell 1000 Growth were up 6%, bringing all three indices into positive double-digit returns for the year. U.S. Small Cap stocks participated in the recent rebound but are relatively flat for the year. Developed International stocks are up over 7% this year, and the European Central Bank delivered a rate in early June as they indicated that Europe was seeing an improvement in inflation dynamics.

In fixed income, credit spreads remained tight, and the U.S. Aggregate Bond Index was up 1.7% in May. Municipal bonds were down -0.29% for the month, while the U.S. Short Treasuries were up 0.48%, and U.S. High Yield did well, with a return of 1.1%. Commodities also gained, up 1.76% in the month, with strength in copper and gold. The MSCI U.S. REIT Index also rebounded in May but remains negative for the year as high interest rates continue to be a headwind.

Closing Thoughts

Despite some unease related to slowing growth and weakening consumer spending, markets have been calm, indicating that the pace of the slowdown could have a positive influence on inflation. Moderation from strong levels is not the same as crumbling growth, and we believe we are simply returning to a more normalized level of growth.

Inflation remains a key focus for both markets and consumers, and we expect it will remain a key area of focus for voters during the upcoming presidential election. Market narratives can ebb and flow, but having a solid financial plan that aligns with your goals can help investors weather the inevitable volatility in markets.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.