The month of May was a choppy one in the market as stocks consolidated the gains made in April. The Dow lead major indexes with a gain of 1.93% for the month. The S&P 500 was up only 0.55% and the tech-heavy Nasdaq was down for the month giving back 1.53%. The rotation in leadership from growth to value continues to be confirmed as value stocks push higher and growth stocks trade sideways to down.
We are observing renewed strength in the international market. Developed country stocks are breaking out to new highs. Emerging country indexes are still consolidating the gains of earlier this year with sideways movement, albeit prices are near the top of the trading band. If emerging stocks follow the lead of developed international stocks, it signals a possible breakout to the upside in emerging markets.
Investors are keeping an eye on interest rates. The short term yield provides an indication of Federal Reserve monetary policy, and the longer term yields reflect the outlook of the market. The Federal Reserve maintains its zero interest policy on short term rates while the yield on the 10 Year Treasury moved sideways in May and consolidated around the 1.6% range. This yield consolidation could be a signal that the bond market is not concerned about more inflation right now. It is early to make that assessment, but longer term interest rates are important to watch over the next few months.
The Federal Reserve Board will meet in the middle of June and investors await the comments regarding the future of short term interest rates. Will the Board hold to its policy of containing short term rates until 2023? Some analysts believe that rising prices will force the Feds to change their zero interest rate policy sooner than expected. Others believe that it is still too early to start increasing rates. Comments from this meeting should indicate if any policy change is coming this summer.
Inflation is front and center with compelling arguments on both sides of the issue. Prices are moving up and that cannot be denied. The question remains as to whether supply can keep up with demand. The economy is growing and there is pent up consumer demand from a year of shut down. Consumers are flush with cash from stimulus programs. Money is still flowing in the form of unemployment checks with an added $300 per week bonus through September in most states. As long as the stimulus money continues, we can expect spending to continue.
Businesses are adjusting to new models that include more work from home, fewer employees, and increased technology. This could result in more productivity and higher profits which is good for business. If the economy can digest the balance of supply and demand, then inflation is likely to remain under control. If demand exceeds supply prices rise and interest rates will rise with it.
We expect the stock market to continue to be choppy as investors respond to the economic data. Summer is historically not the best time for the stock market, but investors have limited choices when it comes to seeking a return on their money.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.