Major stock market indices were mixed in May as investors balanced the implications of elevated inflation readings against economic re-opening optimism. Equity gains were muted for U.S. large caps (S&P 500 +0.7% and Nasdaq -1.4%) and small caps (Russell 2000 +0.2%). Sector level performance diverged again in May as the reflation trade helped the energy, financials and materials sectors resume their outperformance. Foreign equity markets outperformed the U.S. as the MSCI EAFE index was +3.6% and the MSCI Emerging Markets was +1.2%, aided by positive developments around Covid vaccine rollout. Oil prices continued on an upward trend as the benchmark WTI spot futures contract was +7.5% in May and is now +35% YTD.
Fixed income markets continued to stabilize in May as the Bloomberg Barclays U.S. Aggregate index was +0.33% for the month but remains -2.29% YTD. U.S. Treasury yields were close to unchanged as the most notable yield change occurred in the 5 year area where yields declined -5 basis points. Investment grade corporate credit spreads narrowed -4 bps and outperformed duration matched Treasuries by +47 bps. High Yield continued to perform well (+0.30% total return in May) aided by the risk on tone in financial markets.
U.S. economic data released in May was a bit more mixed than the previous month. Job gains of +266,000 were reported to have occurred in April, which was way below expectations of closer to +1,000,000. There were also downward revisions of -78,000 jobs that were previously reported in the previous two months. The unemployment rate ticked up from 6.0% to 6.1%. The May report of Retail Sales was unchanged from the previous month which was very strong and was revised higher. The pace of consumer spending has been robust and now seems to be increasing for service sector as the economy re-opens. The headline CPI monthly reading for April was the highest that it has been since 2009 (+0.8% MoM) and highest annual rate since 1996 (+4.2% YoY). This was above expectations and inflation has become one of the most talked about investment topics of 2021 with a wide range of opinions as to what the long-term rate of inflation will be. The TIPS market is pricing annual inflation to be around 2.5% for the next ten years.