May 2024 - Market Update

The Friedenthal Team

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Key Observations

S&P 500 index rose by 4.96% in May, recovering all of its drop in April. Energy was the worst performing sector, whereas Utilities was the best performing sector two months in a row. Real estate is down 4.37% YTD.

Treasury yield on bonds with maturities > 1yr dropped in May, resulting in a 1.54% gain for the Aggregate Bond Market index.

Inflation is still above the Fed's target with Core CPI coming in at 3.6% YoY, a far cry from the Sep'22 highs. GDP grew at an annualized rate of 1.6% in Q1 2024.

The Fed's comments indicate a holding pattern on short-term interest rates for now, but markets are still pricing almost a 50% chance of a rate cut in September.

Data Dashboard

*Data Source: Bloomberg. As of 5/31/2024*

Stock Market

Stocks continued their bull run, with Utilities & Technology leading the way. The market weighted S&P 500 index is up 11.30% this year, driven by the outperformance of mega caps.

With 96% of the S&P500 companies already reported financial results for Q1 2024, 78% have reported a positive earnings surprise (higher earnings that analysts predicted). Headlines for earnings surprises are as follows: -

Consumer Staples giant Walmart jumped almost 7% on a positive revenue & earnings surprise, beating EPS estimates by 14.21%.
AI chip leader Nvidia jumped almost 10% after beating earnings estimates, and continued its run providing an optimistic outlook for the coming quarters.
CVS Health plunged 16.84% to 2020 lows, after posting earnings miss by 22.58%, and providing a weak outlook going into 2024, citing rising medical costs.

Both Mid-cap & Small-cap US stocks performed well, rising 4.38% & 5.01% respectively.

Utilities has been the best performing sector in the S&P500 in the last three months, returning over 18%. According to Goldman Sachs, this outperformance could be attributed to the rising electricity demands from data centers & increased AI driven computing needs. It is expected to drive a 160% increase in data center power demand by 2030.

May Monthly Returns (by US Sector)

Bond Market

Both the US & Global aggregate bond indexes rose by 1.33% & 1.09% in May, with the 10-year treasury yield falling by 10 basis points to 4.50%. Since Dec-31, the inverted yield curve has steepened across the board, with 1-month yields rising 21 basis points & 20y yields dropping 37 basis points.

High yield corporate bond spreads are hovering around 3% over US treasuries, indicating a low implied risk of default. The Bloomberg High Yield Bond index has returned 11.24% over the past year, benefiting from a relatively strong economy and tighter spreads. High yield bonds can see more significant drawdowns when the stock market is volatile.

Economics

The Fed chose to keep the target rate at 5.25% - 5.5% at its Apr/May FOMC meeting, reiterating that inflation has remained sticky. The retreat from the Sept 2022 high of 6.6% (Core CPI) has been slow but consistent. Core CPI currently sits at 3.6%, with the next read coming on June 12th.

The ISM Purchasing Manager's Index (PMI) came in lower than expected at 48.7 on June 3, from a consensus of 49.5, slipping into contractionary territory. PMI measures the expansion of the manufacturing segment of the economy & is a key economic indicator. Historically, investors interpret a reading above 50 as bullish sign. However, in today's high-rate environment, this might actually be a good sign as the Fed looks for a slowing economy to implement rate cuts.

US unemployment came in at 3.9%, slightly higher than the survey estimate of 3.8%, in line with expectations, suggesting some cooling in the labor market. CPI Core came in at 3.6% YoY, while the PCE index is at 2.75%. The GDP has grown 2.9% YoY, but the Q1 2024 GDP came in lower than expected at 1.6% annualized, well below the consensus of 2.4%, driven by net exports & change in business inventories.

The overnight average of 30-year fixed mortgage rate rose to 7.35% down from 7.55% at the end of April. This was a key factor in the US real estate sector rising over 5% in May.

Existing home sales also fell to a seasonally adjusted annualized rate (SAAR) of 4.19 million in March, as reported by the Federal National Mortgage Association.

May Economic Dashboard

Tactical Trades

For our tactical stock portfolio, we have the highest allocations in Industrials & Information Technology. We are underweighting in Real Estate & Communication services.

Our Tactical ETF portfolio is composed of precious metals, Semiconductors, Japan, Communication & Homebuilders.

For our tactical fixed income portfolio, we are still focusing on short term low duration bonds, which have lower sensitivity to interest rate changes, but offer the highest yields.

General Client Considerations

IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) increase in 2024 from $22,500 to $23,000. Changing your elections at the start of this year can help you to spread out contributions evenly and ultimately maximize your tax advantaged retirement saving. If you are participating in a company sponsored retirement plan and maxing out your contribution, please reach out to your HR department to ensure your contribution amount has been updated to reflect the new maximums.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has remained the same at $7,500 on top of the $23000 limit for everyone else. This means, that beginning 2024, if you are born in 1974 or earlier, you can contribute up to $30,500 to these accounts in 2024. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team