Quick Hits
1. Markets Rebound in May
Stocks rallied after declining in April.
2. Falling Yields Support Bond Prices
Falling interest rates caused bond price to rise.
3. Labor Market Cools in April
The April jobs report showed encouraging signs of softening labor demand.
4. Additional Signs of Slowing Growth
Several key economic updates pointed toward slowing growth.
5. Market Risks to Monitor
Domestic, international, and unknown risks remain for markets.
6. Improving Fundamentals and Positive Outlook
Economic and market fundamentals support future improvements.
Markets Rebound in May
Markets rallied in May, with all three major U.S. indices up for the month. The S&P 500 gained 4.96 percent, the Dow Jones Industrial Average grew 2.58 percent, and the Nasdaq Composite soared 6.98 percent. Equity markets were supported by solid earnings growth and lower interest rates.
Per Bloomberg Intelligence, as of May 30, with 98 percent of companies having reported earnings, the average earnings growth rate for the S&P 500 in the first quarter was 7.8 percent. This is notably higher than analyst estimates at the start of earnings season for a 3.8 percent increase. Growth was widespread, with 10 of 11 sectors beating analyst estimates. Earnings have increased in each of the past three quarters, which is an encouraging sign for investors because fundamentals drive long-term performance.
Technical factors were also supportive. All three major U.S. indices spent the entire month above their respective 200-day moving averages. (The 200-day moving average is a widely monitored technical indicator because sustained breaks above or below this level can signal shifting investor sentiment for an index.) The combination of continued technical support and improving fundamentals in May was welcome after short-lived declines in April.
The story was similar for international equities. The MSCI EAFE Index gained 3.87 percent and the MSCI Emerging Markets Index rose 0.59 percent. Technical results were also supportive for international stocks; both the MSCI EAFE and MSCI Emerging Markets indices spent the entire month above their respective 200-day moving averages.
Falling Yields Support Bond Prices
Falling long-term interest rates helped support bond prices. The 10-year Treasury yield fell from 4.69 percent at the end of April to 4.51 percent at the end of May. Signs of slowing economic growth and a cooling job market contributed to the fall in interest rates. The Bloomberg Aggregate Bond Index gained 1.7 percent.
High-yield bond returns were also positive, supported by stable credit spreads that ended the month largely unchanged. The Bloomberg U.S. Corporate High Yield Index gained 1.1 percent.
Labor Market Cools in April
The May rally for markets was sparked by signs of slower economic growth, which helped calm investor concerns about a potentially overheated economy. The April job report was a highlight; it showed a notable slowdown in hiring, with 175,000 jobs added during the month. This was down from the 315,000 jobs added in March, and it was viewed by investors and economists as a healthy development after months of stronger-than-expected job growth to start the year.
Underlying employment data also pointed toward slower growth, with annual wage growth falling to a two-year low and the unemployment rate picking up modestly. Softening labor market conditions are one factor the Federal Reserve (Fed) has noted could lead to interest rate cuts later this year because of the central bank’s dual mandate to support stable prices and maximum employment.
The Takeaway
- Slowing job growth in April was a welcome development for investors concerned about inflation.
- Underlying data also showed encouraging signs of softening labor demand.
Additional Signs of Slowing Growth
Other economic releases also pointed toward slower but potentially healthier growth for the economy. Personal income and spending growth came in below expectations in April, which is another good sign for investors concerned with inflation. Speaking of inflation, the April Consumer Price Index report was also supportive; it showed that consumer prices rose less than expected in the month and consumer inflation slowed on a year-over-year basis.
Consumer and business confidence also declined in April. As you can see in Figure 1, service sector confidence fell for the third consecutive month, bringing confidence to its lowest level in more than one year. This is a diffusion index, where values above 50 indicate expansion and values below 50 indicate contraction. April marked only the second time service sector confidence has dropped into contractionary territory since the end of pandemic-era lockdowns. The service sector accounts for the majority of hiring in the U.S.; falling service sector confidence signals potentially lower demand ahead for service sector workers.
Figure 1: ISM Services PMI Composite Index
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