May was mostly uneventful for investors. After small gains during the first week, stock markets had a minor selloff before recovering lost ground, leaving the overall U.S. stock market flat. Meanwhile, international stocks returned a few percentage points. Interest rates vacillated and ended the month with a slight decline, assisting the U.S. bond market to a positive 0.33% return.
Such a benign return environment might suggest that the economic recovery has cooled. Not so. Except for a disappointing nonfarm payroll gain, the vast majority of new data released was robustly positive. Initial jobless claims hit a new pandemic low, with the final May data showing a 31% reduction compared to the previous month. Although the pace of home sales is starting to slow, home prices continued reaching new highs. Retail sales maintained their strongly above-trend level, and the latest data on durable goods orders showed a second monthly increase.
A possible explanation for May’s flat returns is that markets simply needed a pause. After so many months of strong gains that pushed prices ahead of fundamentals, a pause makes sense and could be a precursor to volatility. Since the U.S. stock market hit its low in March 2020, there have only been three negative monthly returns, with the worst month being a tame 3.5% loss. Investors have not seen a single 10% price correction during this recovery rally.
It is possible that this market pause could persist to let underlying company fundamentals/revenues align more closely with current stock prices. After the rollercoaster financial markets have experienced over the last year and a half, a period of sideways prices might be healthy. Such an outcome could be a relatively painless way to reduce some of the downside risk pent-up in stocks that have risen without the support of higher revenues. We remind our clients that maintaining a steady course remains the best plan, regardless of a bull, bear, or choppy market.
Lastly, we are thankful to hear that many of our clients are now fully vaccinated. Take care and continue to be safe. If there is anything we can help you with, please let us know.