June 08, 2021

Monthly Market Summary – May 2021

Returns across asset classes were mostly positive for May.  The main exception was growth company stocks with high valuations.  Not surprisingly, a main driver for the positive results was the improving growth outlook as business and social activities rebound as the pandemic situation improves due to the increasing rate of COVID vaccinations and the falling number of new cases in many countries.  Signs of improving economic activity are plentiful.  For example, initial jobless claims in the U.S. declined to pandemic era lows.  The Institute of Supply Management’s services index came in at 62.7, the second highest report on record.  Over the Memorial Day weekend, the Transportation Safety Administration (TSA) screened almost two million passengers per day at airports, the highest level since the pandemic began.  Manufacturing orders in Germany rose 3% in the latest month.  The IHS Markit Eurozone services index rose to 50.5, the first reading in expansion territory (above 50) in eight months.

While the rebound in business and social activity is a positive, the surge in demand coupled with supply shortages of all types and logistical bottlenecks is resulting in accelerating inflation in the U.S. and other countries.  In the U.S., the latest core consumer price index (CPI) report showed a 0.9% increase over the prior month, which was the largest monthly increase since 1981.  The year over year increase was 3.0%.  The producer price index (PPI) jumped 6.2% over the prior year, which was higher than expected.  The Federal Reserve’s (Fed) preferred inflation indicator is the personal consumption expenditure index (PCE).  That index was 3.6% over the prior year, which is well above the Fed’s target of 2%.  Inflation numbers in China, the United Kingdom and other countries were also higher than expected.  Signs of higher inflation raise market participants’ concerns that interest rates could rise sooner than central banks are currently forecasting.  Therefore, financial markets experienced periods of choppiness reflecting the inflation concerns.  Central bank leaders continue to assert that recent price increases are temporary as economies work through pandemic related disruptions.  Investors will likely continue to be focused on inflation indicators.

U.S. equity markets started the month on a high note.  The Dow Jones Industrial Average and the S&P 500 index each hit a record high during the first week.  Then markets trended lower during a period when both intraday and day-to-day volatility increased as investors worried about accelerating inflation.  S&P reported that for half the trading days during May, the spread between the high and low price for the day for the S&P 500 was at least 1%.  The markets did end the month on a positive note as investor concerns ebbed after Fed members reiterated their accommodative policies will continue.  The major indices eked out modest gains for the month.  This was the fourth consecutive month of positive returns for the S&P 500 and Russell MidCap indices and the fifth month of positive returns for the Russell 2000.  Similar to the prior month, the large and mid-sized company stock indices outperformed the small company index.  In a reversal of April results, the value index for each market capitalization (cap) category with positive returns outperformed the growth indices which had negative returns.  The rebound in economic activity drove investors to favor commodity related sectors and financials.  Therefore, the energy and materials sectors had the largest gains for the month while the utilities, information technology, and consumer discretionary sectors lagged.

International equity indices outperformed major U.S. equity indices in May.  The return for the MSCI EAFE index of developed international equities was 3.3% and the return for the MSCI Emerging Markets (EM) index was 2.3% on a U.S. dollar basis.  The declining value of the U.S. dollar contributed to the outperformance of international indices.  The dollar weakened relative to major currencies since U.S. bond yields declined.   The strength in commodities was a reason equity indices for certain countries such as Canada, the United Kingdom, Brazil, and Russia outperformed the U.S.  Just as in the U.S., value stocks outperformed growth stocks in both the EAFE and EM indices.  Energy, financials, and consumer staples were top performing sectors while information technology, communication services, and consumer discretionary were the weakest performing sectors in foreign markets.  On a geographical basis, among international developed markets, the euro region was the top performer as COVID impacts continued to ease as the rate of vaccinations increased.  Japan continued to be a performance laggard as the country continues to feel the impact of a high number of COVID cases.  Among emerging markets, Poland again had the highest return as economic activity improved.  Taiwan, which has been a performance leader for much of the year, had a negative return for May hurt by a rise in COVID cases and the global weakness in technology stocks.

U.S. bond market sector returns were mostly positive in May reflecting strong investor demand despite the low yields.  The 10-year Treasury bond yield traded in a tight range during the month but ended the month at 1.58% down from 1.65% at the end of April.  All bond market sector indices, with the exception of the mortgage-backed securities index, posted positive returns with longer maturity bonds posting the highest returns.  The U.S. credit index had one of the best sector returns reflecting the improving economic outlook.

The Bloomberg Commodity index generated a positive return for May as prices in almost all sectors climbed.  The grains sub-index was one index that declined for May, cooling after a double-digit gain in April.  The precious metals sub-index was up almost 8% likely due to increasing concerns about inflation.  The industrial metals index continued its string of positive returns as demand remains robust.  The price of copper hit another all-time record high during the month.  The price of West Texas Intermediate (WTI) crude oil rose to almost $67 per barrel during the month up from $63 at the end of April on the strengthening demand outlook and tighter U.S. inventories.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

We have a neutral view on growth relative to value preferring to have exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate as the economy improves.  We favor equites over bonds with yields still at historic lows.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international market equities.  We recommend an overweight in emerging markets equities due to expectations for higher economic growth rates than in developed countries and for the potential for a boost to returns from a declining U.S. dollar.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.  We recommend keeping at least a year of cash reserves as we expect bouts of market volatility throughout the year.

 The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions.  These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

 The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.