May 2023 - Market Update

Data Dashboard

Stock Market

The stock market performance was mixed in the month of May. The S&P 500 index ended the month pretty flat, up only 0.43% MTD. The technology sector was the best performer in May, recording an 8.9% return this month followed by Communication Services (3.9%) and Consumer Discretionary (2.5%). Large-cap stocks have once again outperformed small and mid-cap stocks, owing much of the sector's bull run to artificial intelligence (AI)-related stocks.

Nvidia, a prominent semiconductor designer, played a pivotal role in fueling investors' optimism during this period. Nvidia's earnings announcement had a profound impact on the market, propelling its market capitalization to an impressive $1 trillion, while the energy sector declined for the seventh month in a row due to lower oil prices.

May Monthly Returns (by US Sector)

Bond Market

The Bloomberg US Aggregate Bond Index experienced a decline (-1.45%) in the month of May. This decline was attributed to several factors, including the resilience in US economic activity, reduced expectations for future Federal Reserve rate cuts, and the impact of the debt ceiling debate, all of which pushed yields higher (and prices lower).

Although investment-grade spreads remained relatively unchanged at +2 basis points, the overall increase in interest rates had a negative impact on the sector due to its longer duration.

Treasuries experienced a decline due to the possibility of persistent higher rates and concerns surrounding potential default risks arising from the debt ceiling drama. The yield curve between 10-year and 2-year Treasuries inverted to a two-month low of -76 basis points, with longer-term yields rising to a greater extent.

Economics

US inflation has cooled down, with headline inflation decreasing from 5.0% to 4.9% in April, surpassing expectations. One noteworthy improvement lies in the deceleration of "super-core" inflation, referring to core services excluding shelter, a crucial metric monitored by the Federal Reserve and financial markets. Year-on-year, this measure decreased from 5.8% to 5.1%, with a minimal monthly increase of 0.1% in April, the smallest since July 2022, compared to a 0.4% rise in March.

It appears that the Federal Reserve may pause its actions in June as inflation is moving in the desired direction and certain key measures are showing signs of moderation. However, the question of whether the data supports future interest rate cuts remains debatable. Presently, the market reflects expectations of one more rate hike, and then a subsequent cut by year-end. We believe that the journey towards achieving 2% inflation will be challenging and the Federal Reserve will likely adopt a cautious approach.

Tactical Trades

For our Global Tactical ETF portfolios, we sold positions in precious metals and materials while moving into the Japanese, Brazilian and Swiss markets. In the Tactical Stock portfolio, we added exposure to the Technology and Consumer Discretionary sector, as we have seen these two sectors continue to outperform.

As for our Low Volatility Tactical models, there were no trades for the month of May.

General Client Considerations

Below is a table showing the change in contribution limits for 2023:

We look forward to hearing from you!

Thanks,

The Friedenthal Financial Team

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