May Market Update: Smaller Losses & Modest Gains in the Month of May

MAY EQUITY MARKETS

Equity markets got a bid at the end of the month as the correction likely drew in buyers of high-quality companies at attractive valuations.  With oil prices solidly above $100 and rising, it’s no surprise that the energy sector was the best performing category in May, up 15.8%.  This month, only four of the 10 industry sectors recorded negative returns, as seen from the chart below.

Growth stocks weakened again in May, but the -2.3% return was much less severe than April’s -12.1% decline, using the Russell 1000 Growth Index as a proxy.   The premium valuation that awarded growth equities over the last few years has completely disappeared as seen from the chart below, courtesy of Artisan Partners.   

FED POLICY INDUCES A GROWTH SCARE

Fears of inflation have now turned to fears of recession.  With the market froth pretty much unwound from 2021 at this point, we think we are closer to the end of a correction than the beginning.  While we do not see a recession in 2022, we cannot rule out that an aggressive Fed over the next 12 months could cause growth to more than stall.  There will be much speculation and airtime devoted to “recession fears.”  

Ultimately, the Fed will be data dependent on whether they need to keep tightening.  They are currently seeing mixed economic signals (some showing signs of inflation peaking, others not), according to Fed Vice Chair, Lael Brainard.  

Bottom line, inflation is the Fed’s top priority now and the Fed thinks the economy can withstand more tightening so a “Fed pause” after the summer may not be in the cards.  The Fed wants demand to slow in order to bring down inflation, but that does not necessarily mean negative growth (a recession).  The “soft” versus “hard” landing debate will likely endure for months to come.