Mixed up May


Sell in May and go away. That is the old adage, isn’t it? This year, it depends on who you ask, and what you sell. The major equity indices were mixed during the third month of spring, with the NASDAQ up an impressive 8% while the Dow lost 4%. The S&P500 did make a new 2023 high this month, but it ended May basically unchanged. Traders felt relief and optimism from Q1 earnings (and Q2 forecasts), as corporate reports were not nearly as bad as they could have been. From a sector standpoint, we saw energy stocks sold emphatically alongside oil price declines, while mega-cap tech rose on the back of “AI Mania.”

The energy around artificial intelligence has ramped up this year, with mentions of the word “AI” up 5x in earnings calls versus just a year ago. Nowhere was AI Mania on more prominent display than in the price movement of Nvidia stock, which soared 40% during the month and gained over 25% on May 25th alone. In the wake of its earnings and Computex announcements, the stock briefly held a market capitalization of more than $1T, nearly three times larger than where it started the year. NVDA is seen as the engine pulling the AI train, and investors are taking for granted that most future gains from the burgeoning industry will accrue to the company. However, it remains to be seen whether AI turns out to be just another market bubble, no different than Dutch tulips in the 1630s or dotcom startups in the early aughts. Time will tell, but for now, NVDA along with a handful of other tech giants, continue to do much of the heavy lifting for the broader indices.

Within fixed income markets, treasury yields were higher in May, with the yield curve flattening as the short end underperformed relative to later maturities. Of course, this was all due to the debt ceiling anxiety, which dominated headlines as worries of a government default rattled treasury markets. Thankfully, the debate is nearing its end, with the House passing a bill that enjoys bipartisan support, albeit with neither side getting exactly what it wanted. The Senate is widely expected to follow suit, and the bill should be signed into law imminently. It seems that rumors of the government’s demise were greatly exaggerated, as they always seem to be when this issue rears its ugly head.

The Federal Open Market Committee met this month, and unanimously voted to hike its benchmark interest rate to a range of 5-5.25%, the highest level in seventeen years. This move was clearly priced into the markets, as both stocks and bonds took the news in stride. More importantly, the Committee signaled that it would be moving to a more data-dependent approach, which the optimistic market took to mean that we may see a pause in the hiking campaign come June. Either way, pause or no pause, Chair Powell continued to push back against the idea of rate cuts in the back half of the year, as inflation remains stubbornly high and is likely to come down slowly. It is probable that we are in for a “pause and hold” scenario for the next several months.

In terms of the broad economy, the data in May were patchy but generally upbeat. The labor market remains strong and tight, with the unemployment rate sitting at a decade-low mark of 3.4%. Real GDP, which is adjusted for inflation, came in at an annualized 1.3% rate for Q1. This represents a deceleration from last year’s pace of 2.6%, but still clearly shows a growing – not shrinking – economy. The hypothetical recession, which seemed such a foregone conclusion just a few months ago, is still being held at bay by the strength and resilience of the US economy. Good news.

Looking ahead, with an almost-certain resolution to the debt ceiling deal, and the earnings picture far less gloomy than just a few months ago, we think the market will return to grappling with the dual challenges that have been its foils for the last 18 months: inflation and interest rates. As they go, so go the markets.