May Update
May was a stronger month for equities, bolstered by investor optimism about the global economy. The month started strong after a weaker April, driven by optimism around potential interest rate cuts in the US and robust corporate earnings. This sentiment propelled major indices to all-time highs before they cooled off towards the end of the month. Ten out of the eleven major GIC sectors closed the month in positive territory, with notable performances from the Tech and Utilities sectors, which surged by 10% and 9% respectively, fueled by the AI trade and strong earnings. However, the Energy sector experienced a slight dip of 0.4% due to falling oil prices, while Consumer Discretionary managed a modest 0.3% gain amidst concerns over consumer spending raised during corporate earnings calls. In line with these trends, Growth outpaced Value in May, with the Russell 1000 Growth Index posting a 6% gain compared to the 3.6% increase in the Russell 1000 Value Index.
The outperformance of mega tech stocks, including Nvidia (+26%), Apple (+13%), Microsoft (+6.8%), and Alphabet (+6%), contributed significantly to the S&P 500's gains for the month. However, concerns arose as less than half of the S&P members traded above their 50-day simple moving average, prompting questions regarding market leadership and breadth divergence.
Larger & growthier companies continued to outpace smaller & value in 1Q24
2023 was all about large cap growth style companies leading the way, particularly the mega cap tech ‘Magnificent 7. Meanwhile, small caps and value were laggards. 2024 has largely been the same. Interestingly, all large and mid-cap styles hit new all-time highs (ATH) during the March quarter, while small caps remain significantly off their highs.
Source: Ophir Asset Management
December 2023 showed market breadth and smalls outperformed on “peak rates/cuts ahead” talk from the Fed
The closer we get to the expectation of soft-landing, rate cuts becoming a reality (currently forecast by the market in Q4 this year), the closer we may be to small caps having a key catalyst for outperformance.
Source: Ophir Asset Management
Beyond corporate earnings, market attention remained fixated on economic data, particularly indicators of disinflation, geopolitical developments, and Federal Reserve policy. In the US, May's economic data appeared softer than anticipated, with GDP growth slowing to +1.3%, the core PCE price index at +2.8% for April, weaker job creation numbers, and lower wage growth in the April jobs report. Retail sales also fell short of expectations, raising concerns about a potential slowdown in consumer spending.
US Labor Market Cooling
The tightest labor market in US history continues to loosen with Job Openings moving down to 8.49 million (lowest since Feb 2021) , job openings vs job seekers peaked at 1.9 and is now 1.4. The Quits Rate is also moving down to 2.1% (lowest since Aug 2020). Non-farm payrolls were far below expectations at 175,000 jobs added in April, and average hourly earnings came in below expectations. Fallen from jobs per job seeker to jobs per job seeker. Before the pandemic hit in March 2020, there had been 1.2 job openings per unemployed person in an already tight labor market. That indicator then crashed to 0.2 by April 2020 amid mass layoffs in sectors affected by Covid restrictions before climbing as high as 2.0 job openings per unemployed person in March 2022, at the height of the "Great Resignation".
Source: Y Charts
Amidst these developments, the Fed's stance remained under scrutiny, with ample discussion following the May FOMC meeting and the subsequent release of meeting minutes. While the minutes hinted at a somewhat hawkish tone, Chairman Powell suggested a cautious approach, indicating that the disinflation narrative might require more time to unfold. Fed Fund Futures are currently pricing in a 60% chance of a rate cut at the September FOMC meeting as market participants closely monitor economic data and Fed commentary for further insights into monetary policy decisions.
The potential for a second Donald Trump administration is an increasing focus for economic policy analysts.
In a “limited Trump” case, tax cuts get extended, fiscal spending goes up, immigration is curbed, and China and Europe get hit with targeted tariffs (although Biden is doing the same thing as we speak). A “full-blown Trump” deal sees even more tax legislation.
Source: Oxford Economics & Haver Analytics
In May, the Reserve Bank of Australia (RBA) maintained the cash rate at 4.35%, emphasizing a limited tolerance for further inflation. Their economic projections foresee inflation returning to the target range's midpoint by 2026 amidst softening growth and rising unemployment, though flexibility in response to unforeseen circumstances is constrained. While the RBA signals a prolonged hold, there's a bias towards tightening policy.
At its May meeting the RBA kept its policy rate unchanged at 4.35% for the third time. The Boards statement appeared to move from a “hiking tone” to a more balanced or neutral tone. Market implied pricing for an RBA cut are the lowest compared to its developed market peers.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.” RBA Governor, May 2024
Source: PIMCO
April's consumer price index inflation surpassed expectations at 3.6% year-over-year, prompting concerns about persistent inflation, especially in goods pricing. The unemployment rate increased to 4.1% in May from the previous month's 3.9%, reflecting ongoing volatility in job data. Broader labor market indicators suggest continued softening, easing wage pressures. Consumer confidence fell to 88.2 in May, indicating dissatisfaction among Australian consumers, while business confidence remained steady despite a weakening near-term business conditions outlook.
Housing prices nationwide rose by 0.8% month-over-month and 8.8% year-over-year in May. Perth and Brisbane saw the strongest month-over-month price appreciation, while Sydney and Melbourne lagged. Construction activity remains subdued, limiting housing supply and supporting prices. This constrained supply amid steady demand continues to place upward pressure on housing prices across the country.