June 3, 2024

“Let your winners run and cut your losers.”

Peter Lynch

Hoping all had a delightful Memorial Day Holiday. Needless to say, last week was historic but Wall Street basically ignored the theatrics and focused on some key numbers.

Last week, the S&P 500 finished off 1.5% but closed a solid month of gains in May. The Dow Jones Industrial Average was down 1.03% and the Nasdaq finished retreating .31%. Internationally, the FTSE 100 return was -.64%, and the MSCI-EAFE lost .3%. The 2 -year treasury closed with a yield of 4.88% and the 10-year paid 4.5%.

In May, the S&P 500 rose 4.8% for its best month since February while the technology-heavy Nasdaq climbed 6.9% for its biggest monthly gain since November. The Dow rose 2.3% in May for its strongest monthly performance since December. Small-cap stocks in the U.S. were climbing Friday afternoon, with both the Russell 2000 and S&P Small Cap 600 indexes posting gains as they moved closer to closing out May.

As Market Watch opined, U.S. stocks took a roller-coaster ride Friday as investors weighed new data on inflation from the Federal Reserve’s preferred gauge. The S&P 500 made a dramatic turnaround late in the afternoon to reverse its daily losses and finish with a solid gain — although it wasn’t big enough to erase the index’s weekly decline.  “First quarter earnings season was excellent,” said Jeff Buchbinder, chief equity strategist for LPL Financial, in a May 28 note. “Corporate America delivered when it needed to — when stock valuations had gotten more elevated after a strong run and weren’t getting much support from lower interest rates.”

However, investors were in a cautious mood as May came to an end. The jump in bond yields didn’t help, and a couple of notable earnings misses pulled down some high-profile tech stocks (Salesforce and Dell). For the first time in a while, the NASDAQ underperformed the S&P 500 for the week. The average performance of the Magnificent Seven basket was -2.3% over the last five days, although performance for the month was strong.  The apparent good news is “Momentum leads price, and a strong May increases the odds of a decent summer rally,” Ed Clissold, chief strategist at Ned Davis Research, told MarketWatch in a Friday phone interview.

Long-term bonds dipped in value as 10-year yields moved over 4.5% once again. But zooming out a bit, bond yields in general have been in a relatively tight trading range ever since the market started to suspect the Fed was done hiking rates. 10- year yields have traded between 4% and 5% since mid-2023. There wasn’t much news on regarding economic news this week. The monthly PCE inflation report was widely anticipated but didn’t say much. Headline inflation was basically in line with expectations with the headline number up +2.75% over the last twelve months. The other notable economic report was the second revision to 1st quarter GDP. Growth was a touch weaker than originally reported with headline growth up +1.3%, down from the +1.6% originally reported. Surprise, surprise! Consumer spending was the main culprit behind the revision. But looking at growth over the last few quarters, this latest number isn’t really out of line with the previous quarters. Furthermore, estimates for 2nd quarter growth are still running at a robust +3%.

Some light at the end of the tunnel?  The U.S. index of consumer confidence rebounded to 102 in May from a revised 97.5 in the prior month, the Conference Board said Tuesday. This is the first increase in the index after three straight monthly declines. However, Economists think that Americans are still grappling with the higher level of prices left behind after the wave of inflation. If I can state, the obvious. The rising cost of services – housing, travel, medical care – is still the biggest source of inflation. Service prices rose 0.3% in April, the government said last Friday. We believe that until inflation begins to cool, the stock market’s struggles are likely to continue, albeit managing positive returns for the year.

On the jobs front…Initial jobless claims rose by 3,000 to 219,000 in the week ending May 25, the Labor Department said Thursday. Economists polled by The Wall Street Journal had estimated new claims would rise to 218,000.

On the interest rate front, it obvious the Federal Reserve has no short-term plans to cut interest rates, but internationally, despite some talk it might hold steady, the Bank of Canada is expected to begin cutting rates this Wednesday with an incremental 25-basis-point move. There is no uncertainty at all that the European Central Bank will begin cutting rates, also by an expected 25 basis points, coming on Thursday. The Reserve Bank of India on Friday is expected to hold its policy rate steady. Eurozone retail sales on Thursday are expected to show slowing monthly growth, while German manufacturing orders on Thursday and German industrial production on Friday are both expected to rebound modestly from prior declines. Moderate growth is the call for both US and Canadian employment on Friday. US nonfarm payrolls are expected to rise 195,000 with average hourly earnings seen up 0.3 percent on the month for a steady annual rate of 3.9 percent.

Housing? Pending home sales plunged in April as buyers felt the effects of an expensive housing market. With home prices and mortgage rates rising, buyers seem to be pulling back on signing contracts on homes for sale. Pending home sales fell 7.7% in April from the previous month, according to the monthly index released last Thursday by the National Association of Realtors.

Any good news on oil and gas prices? In a word, no. (see inflation comment above) The Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, has agreed to maintain current voluntary production cuts through next year. Their decision is expected to keep oil prices higher through the U.S. presidential election. The move comes as the U.S. summer driving season begins and as U.S. weekly oil production is near record highs. And it follows the Biden administration’s May 21 announcement that it was releasing one million barrels of gasoline—about 42 million gallons—from the nation’s Northeast Gasoline Supply Reserve, in a move timed to help keep retail pump prices lower, according to the Energy Department.

Looking ahead, there is cause for optimism, the U.S. stock market is turning a corner into a new month, with bullish investors looking to overcome lingering anxieties over inflation and higher interest rates. The S&P 500 SPX ended Friday with a weekly decline as the 10-year Treasury yield rose, snapping five straight weeks of advances that had helped propel the index to a May gain of 4.8%. The monthly jump marked the gauge’s best performance since February, leaving it up 10.6% so far in 2024. “It’s still early cycle for equities,” said Andrew Slimmon, senior portfolio manager for U.S. equities at Morgan Stanley Investment Management. “Fear of missing out clearly has not kicked in yet,” Slimmon said, explaining that many “investors are very satisfied to sit on the sidelines and watch” as they benefit from yields of more than 5% from cash-like securities in money-market funds.

Mike