Time to Transition, but Not Forget
Most people view Memorial Day as the beginning of summer but it is important not to forget the real reason for the holiday – a day of remembrance for those who gave their lives fighting for our country while serving in the Armed Forces. We must never forget those individuals who gave the ultimate sacrifice fighting for our freedoms. The gratitude we provide as a nation not only extends to those individuals but also to their families. Be sure to take time to honor and remember those who have died while serving. Because of where it falls in the year, the last Monday in May, it does mark the unofficial beginning of summer including the transition to much warmer weather, welcomed by most in our part of the country. This year investors are hoping it also brings a transition in the markets since this has been a challenging year thus far, with last week giving us some glimmers of hope.
The stock market finally broke its eight-week losing streak, tallying the strongest one-week performance in 18 months. Stocks began to rally on Wednesday with the release of the minutes from the most recent Federal Reserve meeting which showed the Fed has stated they are willing to take whatever steps are necessary to fight inflation. This was interpreted to mean they will continue to aggressively raise interest rates and came as welcome news to the markets which have been mired by the prospects of continued elevated levels of inflation, exacerbated over the last few months by higher energy prices. The markets showed strength throughout the remainder of the week, including on Friday after the release of the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE), showed inflation remaining elevated but less than the previous month. This could indicate we are now past “peak” inflation and inflation will slow in coming months, but it will take a few months to determine if this is in fact a trend, or a temporary variation in data. With energy prices stabilizing and housing beginning to show signs of softening, we think inflation will slow over the next few months but will continue to remain above historical averages. Expect to see further increases in consumer prices, especially since many supply chain issues continue to persist and will take time to fully resolve.
Sell in May?
The old adage of “Sell in May and Go Away” may not be wise to follow this year. Because the markets have suffered some of their steepest losses in history during the first five months of the year, the path of least resistance could be to the upside. While technically never closing in bear market territory, the S&P 500 remains well off all-time highs. During elongated periods of down markets there are often rallies where the markets perform strongly over a short time, but eventually continue to head lower. The performance of the S&P 500 last week could be the beginning of a full-blown rebound or it might be a short-term market bounce. With the expectation the Fed will continue to raise interest rates, we are not convinced we have seen the market bottom and some headwinds remain for the market, however, we do not see signals of a more drawn-out downturn since many of the market fundamentals remain solid. Certain sectors of the economy are showing some cracks, such as housing, but employment remains strong, corporate earnings continue to grow, albeit at a slower pace than the previous two years, and stock valuations are now much more in-line with historical averages. Any moves lower in the market, while still very much possible, are likely to be relatively muted.
We remain vigilant when it comes to consumer spending since consumers make up such a large portion of the overall economy. Spending for discretionary items is slowing as consumers paychecks are not going as far and essential items, such as food and housing, are now making up much larger parts of household budgets than they were a few months ago. Last week the broadly watched University of Michigan Consumer Sentiment Survey remained positive but showed a weakening from earlier in the month, thus suggesting spending will continue to slow. Consumer spending is not expected to pick up again until wage growth catches up with inflation, which appears will take some time and may not occur for the better part of a year, given the current trajectories of each.
The month of May will soon be in the books and we will transition into the summer months, which historically are a time of minimal volatility for the markets. Despite what has been experienced so far, this year will most likely be no different. However, we would advise against selling in May and completely forgetting about the markets for the next few months. It may not hurt to keep some cash available should the market fall further and the rally of last week end up being a bit of a “head-fake” but being completely out of the market could be unwise should the rebound continue in earnest, which has the potential to accelerate quickly.
The employment reports will be released at the end of this coming week and since employment is such an important component of the economy, this will continue to garner special attention over coming months especially as we try to predict whether or not we will enter a recession. But as we’ve said in the past, it can be fruitless to predict the timing of a recession from the stock market perspective since generally any market downturn occurs well in advance of a recession and may have already occurred.
The purpose of Memorial Day is to take time to remember the members of our military who fought bravely for our country and did not make it home. This is also a good occasion to remember all loved ones who are no longer with us, including the impact they may have had on your life. Similar to how Memorial Day marks the beginning of summer and (hopefully) a sustained transition from the cold to the warm, we remain optimistic this also marks a transition to more prosperity in the stock market. If this year’s market volatility has caused you concern, please contact us to review your portfolio as well as ensure your income plan remains intact.
Have a great week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
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