While the story line for equities evolved during May 2023, the bottom line remained the same, as despite deteriorating market breadth, a handful of macro cap tech stocks enabled U.S. indices to close higher on the month. Hence, the S&P 500 (white line, right axis) exited May matching the price levels of mid-March 2022, back when the Fed initiated its series of rate hikes (red line, left axis). Washington’s end of month debt ceiling and spending agreement, plus the growing belief that a ‘not too hot, not too cold Goldilocks ‘economic environment may be unfolding in the U.S. (jobs data last week), undoubtedly played roles in the positive outcome. However, it strikes us that the role of large systematic buy programs should not be underestimated.
A mere gently slowing economy and ‘sticky’ inflation combined to cause late April, Q1 S&P 500 (SPX) earnings to print better than recently lowered estimates. This ‘beat’, combined with investor positioning focused on not wanting to miss the traditional ‘Fed is done’ rally, catalyzed the +2.87% surge in stocks during the last two trading days of the month, enabling the SPX to print a 2nd consecutive positive month.
A confluence of factors continues to catalyze choppy, rangebound markets as investors strive to determine whether the Fed will be able to bring inflation under control prior to the U.S. economy falling into a recession. The convergence of the two lines inside the yellow oval on the far right of the 60+ year graph below speaks to this dilemma facing fundamental investors. On the one hand, the Fed’s main inflation metric surprised last month (white line, right axis) to the upside, while last week’s ISM Manufacturing Index (red line, left axis) screamed recession.
The first two trading days of February for the S&P 500 exhibited the same fear of missing out (FOMO) activity that played a significant role in fuelling the big move higher in stocks during January. Thereafter, slowing inflation (bullish), but not at a fast enough pace (bearish), provided fodder for both the bulls and the bears, keeping equities range-bound until mid-month when a stream of divergent data caused equities to ultimately succumb, giving back roughly half of their January gains.