In May, we witnessed a substantial rebound across the broad markets, marking a notable turnaround from April’s selloff. Equity markets in particular spearheaded the recovery, while alternatives (represented by the S&P GSCI Index), which previously led the way in 2024, posted their first negative monthly returns of the year.
“The labor market’s signs of cooling were reinforced by the second estimate for Q1 2024 Real GDP, released on May 30th, which revised the initial ‘advance’ estimate for Real GDP annualized growth down from 1.6% to 1.3%.”
In May, inflation metrics demonstrated relative stability compared to the previous month, with both Headline PCE and Core PCE posting slight downticks in year-over-year price growth, dropping from 2.70% to 2.65% and from 2.81% to 2.75%, respectively. However, a closer look at the month-over-month changes in Core PCE reveals a more notable trend, as April’s reading dropped from 0.30% to 0.20%. This projected annualized rate of 2.43% demonstrates a trend of greater progress towards the 2.0% target if the Fed is able to continue this trajectory.
The US job market has remained resilient, with the unemployment rate rising very slightly to just 4.0%. Additionally, the U.S. economy added approximately 272,000 jobs, significantly outperforming expectations for the month. This is encouraging news, though there are still certain elements of the labor markets that pose some uncertainties around how strong the jobs market truly is. Initial claims for unemployment insurance have been steadily rising, with an increase of 8,000 last month, bringing the total to 229,000. Further, available jobs dropped from 8.36 million to 8.06 million, while unemployed persons increased slightly from 5.2 million to 5.68 million. This tightening of the labor market seems to be primarily driven by declining available jobs and is indicative of deceleration in job growth that could signify a broader economic slowdown.
The labor market’s signs of cooling were reinforced by the second estimate for Q1 2024 Real GDP, released on May 30th, which revised the initial ‘advance’ estimate for Real GDP annualized growth down from 1.6% to 1.3%. This downward revision is mainly due to lower consumer spending and private inventory investment, partially offset by an upward revision in state and local government spending.[1] This release shows a potential weakening trajectory in the consumer, and while GPD growth is still anticipated to be in positive growth territory, it remains well below the 10-year average real GDP growth rate of 2.6%.
While the economy is beginning to exhibit signs of ‘cooling’, the markets have welcomed this data as a favorable news, spurring the sizeable recovery we saw in May. The moderate cooling of economic activity indicates a ‘soft landing’ (i.e., achieving the 2.0% inflation target without triggering a recession) may in fact be potentially achievable.
As the month of May concluded, both equity and fixed income markets displayed noteworthy resilience, staging a commendable recovery following the selloff witnessed in April. Although the S&P 500 Index experienced its first weekly decline since mid-April, it still ended the month with a robust gain of 4.80%, closing at 5,277. This brings the large cap equity index’s year-to-date return to 11.3%.
In the first quarter of 2024, the S&P 500 saw a blended (year-over-year) earnings growth rate of 5.9%. If this figure holds as the actual growth rate for the quarter, it will be the largest year-over-year earnings growth rate reported by the index since the first quarter of 2022. Additionally, the forward 12-month Price-to-Earnings (P/E) ratio for the S&P 500 is recorded at 20.3. This P/E ratio surpasses both the 5-year average of 19.2 and the 10-year average of 17.8. Such a valuation suggests that stocks are currently trading at a higher price relative to their earnings compared to historical averages. [2]
Small caps, on the other hand, continue to offer a potential opportunity for value. While small caps have struggled over the past several years and especially during the recent high interest-rate environment, they are exhibiting very low valuations (such as the forward price-to-earnings ratio) compared to historical averages. Year-to-date returns of 1.59% for the S&P SmallCap 600 Index remains well behind the mid and large cap indices, however they posted the largest monthly gains in May, returning 5.05% for the month amidst growing hope for a soft landing, showcasing the opportunities for growth if elevated interest rates begin to decrease.
- https://www.bea.gov/sites/default/files/2024-05/tech1q24-2nd.pdf
- https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_053124.pdf
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~Diligently Yours,
Your Smarter Way Portfolio Management Team
Please note this is for information purposes only and should not be construed as investment advice or recommendations made by A Smarter Way to Invest. Please contact your Advisor if you have any questions about this market update report or if you would like to discuss your personal financial situation in more detail.
