May 2022 Market Commentary: Soft Landing or Cliff Drop?
Data Source: Bloomberg
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May 2022 Highlights:
- After having sold off throughout the first half of May, global stocks recovered to end barely positive. Ongoing COVID lockdowns across key Chinese port cities, notably Shanghai, heightened prospects of central bank tightening, and poor 1Q2022 earnings releases drove much of the selling pressure, but then equities recovered from oversold conditions and over prospects that the Fed may engage in less tightening despite inflationary pressures. In May, the MSCI All-Country World Index (ACWI) returned 0.1%, recovering from a 6% sell-off earlier in the month.
- Across major regions, MSCI Japan and MSCI Europe outperformed in May, returning 1.6% and 0.7%, respectively, followed by MSCI Emerging Markets (+0.4%), MSCI Asia ex-Japan (+0.2%) and S&P 500 (+0.2%). Japan recovered some of its yen depreciation following yield curve control policies implemented in April to cap government bond yields, while European financials continue to recover performance lost at the onset of the Russia/Ukraine conflict.
- Within the U.S., U.S. smalls caps outperformed large caps, while value stocks (primarily driven by energy and financials) marginally outperformed growth stocks, as the latter suffered from earnings disappointments from consumer retail. The S&P 600 Index returned 1.9% versus the 0.2% for the S&P 500. S&P Pure Value marginally outperformed Pure Growth, returning 4.3% versus 3.5%, respectively, although both pure styles notably outperformed the broader market.
- The Energy Sector surged in May benefiting from higher oil prices; Utilities and Financials also outperformed while Consumer Staples, Discretionary, and Real Estate underperformed.
- In May, factor dispersion was narrower relative to prior months. Among risk factors, High Dividend and Value Factors outperformed all other risk factors benefiting from the outperformance of Energy, Utilities, and Financials.
- Investment grade fixed income reversed some of the YTD losses with a positive return in May as interest rates dropped from mid-month peak levels as did borrowing spreads (the spread in borrowing costs relative to government debt) across corporate and asset-backed securities. At one point during the month, the 10-Year U.S. Treasury Yield reached 3.13% before pulling back, having settled at 2.81% at the end of May. The Bloomberg/Barclays U.S. Aggregate Bond Index returned 0.6% for the month. Non-U.S. bonds performed worst due to U.S. dollar strength and a sharper rise in interest rates as the Global Aggregate ex US Index returned 0.0%.
- S. high yield marginally underperformed the broader fixed income market even though credit spreads narrowed towards the end of the month. The Bloomberg / Barclays US High Yield Index returned 0.2%, while Bloomberg/Barclays Emerging Market Debt Local Currency returned 1.7% benefiting from currency strength.
- Within equity alternatives, S&P GSCI Commodities Index returned 5.1% as oil prices remain elevated near $115/barrel even though May saw a sharp pullback in industrial metal prices. It is notable that commodities performed well in May despite the ongoing COVID lockdowns across China, which led to a slowdown in commercial activity and in global shipping delays. The S&P GSCI Precious Metals dropped 3.8% as gold prices pulled back in the face of central bank tightening. The Dow Jones REITs Index returned -4.7%, underperforming the broader U.S. equity market.
- Market and political pundits are now in recession watch as geopolitical instability and tighter monetary policies seem to be chipping away at the pandemic recovery. Can the U.S. economy experience a recession but not Corporate America? Wall Street analysts are projecting 10.1% earnings growth (10.2% revenue growth) for the S&P 500, with much of that growth back-end loaded 2nd half of 2022. So far, company management and sell-side analysts remain cautiously optimistic that the U.S. won’t enter an earnings recession.
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By: Benjamin Lavine