Hello all - we hope you had a nice May.
The month was an interesting one for the markets. The Dow lost 3.5%, the S&P 500 rose just 0.2%, and the Nasdaq, which has a higher concentration of tech stocks, gained a solid 5.8%.
The month was an interesting one for the markets. The Dow lost 3.5%, the S&P 500 rose just 0.2%, and the Nasdaq, which has a higher concentration of tech stocks, gained a solid 5.8%.
Here’s a look at how the markets moved this month:
Notice the wide divergence in how the markets performed? The Nasdaq was up significantly and the Dow was lower. This was one of the big stories this month.
Much of the performance of the markets is being driven by just a handful of stocks. And they are all related to AI, or artificial intelligence.
You’ve probably heard a lot of interesting stories about AI in the last few weeks and investors are excited, too. This has driven up the share price of companies related to the technology - from computer chip-making Nvidia to other beneficiaries like Microsoft - these stocks have soared recently.
Here’s a look at the performance of a basket of AI-related stocks:
Much of the performance of the markets is being driven by just a handful of stocks. And they are all related to AI, or artificial intelligence.
You’ve probably heard a lot of interesting stories about AI in the last few weeks and investors are excited, too. This has driven up the share price of companies related to the technology - from computer chip-making Nvidia to other beneficiaries like Microsoft - these stocks have soared recently.
Here’s a look at the performance of a basket of AI-related stocks:
The biggest names in the S&P 500 are now all tech-related. If we were to look at just the top-seven stocks, they’ve averaged a 44% gain in the last six months. The remaining 493 stocks in the S&P 500 have risen just 1%. That’s quite a difference!
Further, the five-biggest stocks in the S&P 500 now make up nearly ¼ of the entire index!
The growth in so few stocks has distorted the performance of the markets. It may sound great to see the indexes up this month. However, that performance is due to just a handful of names. Below is a chart showing the S&P 500 with every stock given the same weighting. As you can see, the market is actually lower by this measurement.
This is an important consideration. Investors call this the “breadth” of the market. You want to see more stocks participating in an increase rather than what we are seeing now. It is a sign the market is on weak footing and caution is warranted.
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DEBT CEILING DEBATE
The other big story moving the markets this month was the debt ceiling fight in Washington.
You’re probably already aware of the details of the debate, so we won’t get into them. But investors were playing close attention, too. When it looked like a deal was unlikely, the markets were lower. When an agreement was struck, markets rallied.
At present, there is still some uncertainty as it must pass Congress, but the odds of passage are high. A final passage will likely help the markets.
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THE FED
The Fed was back in the news, too, as it held another policy meeting. They raised interest rates again, which makes borrowing money more expensive.
This pace of rate hikes continues to be the fastest on record.
The Fed seemed to indicate they were done raising interest rates for at least a couple months, which the market liked.
However, several regional Fed presidents made comments this month that they would like to see even more rate increases since inflation is still high. The potential for further rate hikes made investors a little nervous and added some volatility back into the markets.
However, several regional Fed presidents made comments this month that they would like to see even more rate increases since inflation is still high. The potential for further rate hikes made investors a little nervous and added some volatility back into the markets.
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INFLATION
We’ll first look at inflation before getting into the other economic data. As you can see in the chart below, inflation continues to move lower.
However, that is looking at inflation on an annual basis. When you look at inflation month-by-month, inflation is still rising every month.
Inflation is also steadily rising when we exclude food and energy from the calculation (which economists call the “core” measurement).
Inflation at the business level had looked like a bright spot as it was moving lower, but it moved higher again last month.
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ECONOMIC DATA
The data released this month shows an economy that while slow, showed a little life.
We’ll first look at an indicator we’ve discussed a lot recently, which is the leading economic indicator index. It combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).
This index has been lower for 13-straight months. It has never gone this low without a recession following.
One of the leading indicator metrics is corporate profits, which as you can see in the chart below, turned lower.
As for the good news, both the manufacturing and service parts of our economy moved higher last month, though they both remain very slow.
Retail sales turned higher.
Durable goods (these are items with a longer life, like a phone or refrigerator) were higher again, too.
Consumer confidence moved lower again last month.
Finally, confidence at small businesses continues to languish.
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Where does the market go from here?
Its tough to tell and we don’t have a lot of conviction either way.
A passage of the debt ceiling may provide some support to stocks.
The Fed holds another policy meeting in mid-June and we worry they might surprise with another rate hike. This would be a negative for the markets.
Then there is the enthusiasm over AI stocks. These stocks have seen massive increases – and it’s not unusual for big gains to be followed by big reversals. The chart below shows how some of the other recent hypes have turned out.
There’s a lot going on right now, so we will remain cautious.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
