Session Summary:
After a volatile session , the major indexes ended up closing higher, defying early declines. The $S&P 500(.SPX)$ gained 0.8%, erasing earlier losses of as much as 0.8%. The $NASDAQ(.IXIC)$ was down as much as 1.7% before finishing the day flat. The Dow Jones Industrial Average staged an impressive late-day rally, surging 575 points or 1.5% higher for its biggest daily gain since early November.
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The rally reversed a two-and-a-half day slide for stocks and capped off a surprisingly strong month for equities. The S&P 500 ended May 4.8% higher, marking its best May performance since 2009. The old adage of "Sell in May and Go Away" clearly did not play out this year as investors shrugged off seasonal weakness.
Adage
Main Economic Events and Data Releases:
- The core Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 0.2% month-over-month and 2.8% year-over-year, matching forecasts. While not hotter than expected, the data showed persistent stickiness in inflation.
- Personal income increased 0.3% month-over-month as expected, while consumer spending rose just 0.2%, below the 0.4% estimate. After adjusting for inflation, spending declined 0.1% driven by a 0.4% drop in goods spending.
- The overall picture painted by the data releases was one of moderating economic growth amidst lingering inflation pressures. This maintained hopes for an eventual pause and rate cuts from the Federal Reserve later this year.
- Other key data included a surprise 4.9% jump in new home sales, though consumer confidence declined as high prices weighed on sentiment. The Q1 GDP revision was also revised up slightly to 1.3% growth.
- Looking ahead, all eyes will be on the closely watched monthly jobs report due out on Friday, with economists forecasting 180,000 nonfarm payroll additions in May.
Market Scenario:
Despite persistent inflation concerns and signals of slowing growth, stocks managed to mount an impressive rally in May, defying the historical tendency for weakness. The S&P 500's nearly 5% monthly gain was its strongest May performance in over a decade.
The resilience appeared driven by rising hopes that the Federal Reserve could achieve a soft landing and eventually pivot to cutting interest rates later this year or in early 2024. Cooling inflation data in recent months has emboldened investors to price in rate cuts, even as Fed officials maintain a more hawkish stance.
However, the sustainability of the market's optimism remains uncertain. If upcoming economic releases disappoint or the Fed pushes back more forcefully against premature rate cut bets, it could lead to heightened volatility and downturn for stocks.
Fed
Key factors to watch include the monthly jobs report, which could shape Fed rate hike expectations, as well as signals on the trajectory of inflation from reports like the Consumer Price Index (CPI). Corporate earnings and guidance will also be crucial, with concerns lingering about the impact of higher rates on margins and consumer spending.
Another risk is that stocks may have gotten ahead of themselves pricing in an imminent pivot, leaving them vulnerable to a correction if a resilient economy forces the Fed's hand in keeping rates higher for longer. Historically, rate cuts have often occurred well into economic downturns.
Analysts have also warned that the market breadth has narrowed considerably, with returns being driven by a handful of big tech names and AI-related plays. Any rotation out of this concentrated leadership could unleash volatility as well.
Geopolitical tensions, including the war in Ukraine and frictions between the U.S. and China over issues like Taiwan, also remain an overhang with potential to rattle markets.
Overall, while May's strength demonstrated the resilience of equities in the face of headwinds, the near-term path ahead appears fraught with risks and the potential for increased choppiness if key pillars underlying the rally falter.
Conclusion
In conclusion, Wall Street staged an impressive rally in May, defying the typical seasonal weakness as well as concerns over inflation and economic growth. The S&P 500's near 5% monthly gain was a remarkable show of strength.
However, the resilience may be tested in the weeks ahead as crucial economic data releases, corporate earnings, and Fed policy updates shape the outlook. While investors have grown optimistic on a soft landing and rate cuts, any upsets to those predictions could incite volatility.
Ultimately, the sustainability of May's rally will hinge on whether the economy can navigate a path of moderating inflation without tipping into a severe downturn. Time will tell if Wall Street's current optimism is justified or premature.
This analysis is provided for informational purposes only and does not constitute financial advice. Investors should carefully consider their individual circumstances before making any investment decisions.
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