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The Quick Facts

• U.S. large-cap equities posted their best monthly performance since February, with the S&P 500 up 5.0%.
• Large cap Growth outperformed large cap Value by 2.8% in May, bringing the YTD outperformance to 5.4%.
• All sectors posted gains, except for Energy (-0.3%), led by Utilities (+9.0%) and Technology (+7.1%).
• Treasuries extended gains as Core personal consumption expenditures (Core PCE) inflation was below forecast in April.
• Economic data released in May were marginally softer than expected.
• Federal Reserve (Fed) fund futures have now priced in a 59% probability of a rate cut at the September meeting.

U.S. large-cap equities posted their best monthly performance since February, with the S&P 500 up 5.0% in May (+11.3% YTD), thanks to AI-driven optimism. The S&P 500 recouped its April (-4.1%) decline and posted new all-time highs. Small caps fared similarly to their large-cap peers, with the Russell 2000 Small Cap Index up 5.0%, bringing back the YTD performance in positive territory (+2.7%).

All sectors posted gains, except for Energy (-0.3%), led by Utilities (+9.0%) and Technology (+7.1%). Large cap Growth outperformed large cap Value by 2.8% in May, bringing the YTD outperformance to 5.4%.

Economic data released in May were marginally softer than expected. The updated GDP Q1 2024 came in at 1.3% (1.5% expected), down from the originally reported 1.6%, as Personal Consumption came in at 2.0% (2.2% expected), down from the initial 2.5% report. Early May, the Bureau of Labor Statistics reported that the U.S. economy added 175,000 jobs in April, the slowest jobs gain in six months and below consensus. The unemployment rate ticked up from 3.8% to 3.9%.

The macro data should help the Fed regain confidence that inflation is on track to get back to its 2% target, although it may well take a few more quarters than expected.

May Asset Class Performance

Core PCE inflation – the Fed’s preferred measure – was below forecast in April, with the headline at +0.3% m/m (2.7% y/y) and the core measure +0.2% m/m (2.8% y/y). “Higher for longer” has been a term broadly used by market participants to reflect the Fed’s position in 2024. The Fed acknowledged in the statement issued after the May 1 Federal Open Market Committee (FOMC) meeting that in recent months, there had been “a lack of further progress toward the Committee’s 2% inflation objective.” Markets have adjusted and expect the Fed to remain restrictive (i.e., on hold) until the core inflation backdrop improves or something breaks in the economy. The next Fed move remains likely to be a cut, but not before the September 18 meeting. Fed fund futures are now pricing in a 59% probability of a rate cut at the September FOMC meeting and an 85+% probability of two more pauses at the June and July meetings.

Growth was up 6.0% in May, outperforming Value by 2.8%. YTD, the Russell 1000 Growth Index is up 13.1% and 5.4% ahead of the Russell 1000 Value Index, despite higher risk-free rates. Over the last three years, the total return of the Large-cap Value index has lagged the Large-cap Growth Index by 20.0%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was up 5.0% in May but only 2.7% YTD, reflecting the vulnerability of small companies to higher interest rates. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 4.5% in May, 0.5% less than the S&P 500. Over the last three years, the ESG index is up 23.0% and 8.5% behind the S&P 500 on a total return basis.

Emerging markets equities underperformed in May, with a 0.6% return. They remain behind U.S. and EAFE (Europe, Australasia, and the Far East) equity returns year-to-date (+3.4%), over the last 12 months (+12.4%), and over the last 3 years (-17.5%).

Treasuries extended gains as core PCE inflation was below estimates, posting the smallest increase this year. Inflation and other economic data remain the primary drivers of the bond market, with a data-dependent Fed on pause. The 10-year U.S. Treasury ended May at 4.50% vs. 4.68% at the end of April, 3.88% at the end of December 2023, and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury closed 16 basis points lower on the month at 4.87% vs. 4.25% at the end of 2023. The 2y x 10y yield curve remains inverted by 37 basis points at the end of May. The U.S. Aggregate bond index was up 1.7% in May, its best monthly performance YTD, after a -2.5% return in April, bringing the YTD return to -1.6%. The Municipal Bond Index was marginally down 0.3% in May (-1.9% YTD). U.S. Corporate High Yield was up 1.1% in May with a YTD return of 1.6%.

Gold prices climbed to a new record high of $2,439 per OZ on May 20 and closed May up 1.8% (12.8% YTD). Oil futures, as measured by the WTI Crude Oil $/bbl., were down 6.0% in May to $77 bbl.  The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, weakened by 1.5% in May, bringing the YTD gain to 3.3%. A weaker dollar is generally good news for equity markets and commodities, just as a strong one tends to hold back stocks and other risky investments. Crypto valuations benefited from a “risk on” environment and positive regulatory news. BlackRock’s Bitcoin Spot ETF (IBIT) has officially overtaken the Grayscale Bitcoin Trust (GBTC) as the #1 bitcoin spot ETF, with more than $20 billion raised since its launch in January 2024. In what was a surprising move, the Securities and Exchange Commission (SEC) approved the creation of spot Ethereum ETFs in May. Bitcoin’s value rallied 27.9% in May and is up 66.1% YTD. Ethereum followed the trend with +13.0% in May (+59.1% YTD).

Interest rate volatility has been constant since the Fed began its rate-hiking cycle in 2022. While equity investors focus on the well-known CBOE Volatility Index (“VIX”), bond investors closely watch the less well-known ICE BofA MOVE (“MOVE”) Index, which measures bond market volatility. The MOVE Index resumed its downtrend to close May at 91, after a spike to 120 in April and from an 86 low at the end of March, and still higher than the post-Global Financial Crisis (GFC) average of 80, indicating a more certain rate environment. The VIX remained very low throughout the month of May, trading in a narrow range between 11.5 and 16.5, compared to the post-GFC average of 18.5. A low VIX can be a sign of complacency in the stock market.

Chart of the Month – U.S. Treasury 10-year Yield Decomposition into Inflation Expectations + Real Yields ¹

The real bond yield refers to the return on a bond investment after adjusting for inflation expectations. It represents the actual earning power of the investment, reflecting the true increase in purchasing power that an investor gains from holding the bond. Real bond yields are critical measures for investors because they provide more accurate assessments of the bonds’ profitability, taking into account the erosion of value due to rising prices.

Inflation-indexed bonds, such as Treasury Inflation-Protected Securities (TIPS) in the U.S., are designed to provide investors with protection against inflation. The principal value of these bonds adjusts with inflation, and the interest payments vary accordingly. The yield on these bonds is considered a real yield because it inherently adjusts for inflation.

Changes in expected future inflation directly impact real bond yields. Higher expected inflation typically reduces real yields, as nominal yields might not fully compensate for the anticipated rise in prices. Central bank policies, including interest rate adjustments and quantitative easing, influence nominal yields and, consequently, real yields. Strong economic growth can lead to higher nominal yields due to increased demand for capital and potential inflationary pressures, affecting real yields. The supply and demand for bonds in the market also play a crucial role in determining both nominal and real yields.

Real yields have moved significantly higher – due mostly to the move in nominal yields (inflation expectations have remained relatively stable). There is now value in bonds.

Quote of the Month

“Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.” – Warren Buffett

Major Asset Class Dashboard

RELATED LINKS

Macro & Markets: May 2024 – An Update from Chief Investment Officer, Michael G. Dow

Beacon ‘Pointe of View’ – A Market Update May 2024

Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

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