Monthly Market and Economic Update - May 2024

Current Market and Economic Conditions

• In May, the S&P 500 Index was up 4.96%, while the Bloomberg Barclays US Aggregate Bond Index was up 1.70% and the Bloomberg Barclays Municipal Bond Index was down 0.29%.
• The stock market reversed its April stall and made new all-time highs in May. The upward momentum of the market is still driven by the promise of AI.
• The job market also seems to be stabilizing as job openings, job changes, and wage growth all seem to be falling back toward more historically normal levels. This is signaling to the markets that inflation may continue to fall as well.

Bond Market     

• Recent data regarding the job market has bond investors slightly more confident that inflation may be becoming tamer. While still above historical highs when compared to the economic cycles in the past two decades, the number of job openings (measured by the JOLTS Index) has fallen to just over 8 million from a cycle peak of 12 million jobs available in early 2022. The ratio of jobs available to the number of unemployed people has also fallen to the level that was the ratio’s high point prior to the 2020 Covid-19 shutdown. 
• This softening of the job market data raises the question of whether this is merely a sign that the job market is normalizing or that it is a sign of a broader economic slowdown. The consensus is pointing toward a normalization at this point rather than something more dramatic. The interest rate on the 10-year Treasury bond fell 30bps during May and is currently around 4.3%. This is a sign that the bond market is gaining confidence in the fight over inflation. Currently, the futures market is predicting that the Federal Reserve Open Market Committee is likely going to reduce the Fed Funds rate in September and December. However, that is less certain than what was projected at the beginning of the year when the futures market had been pointing toward four or more ¼ point reductions during 2024.
• For bond investors, the combination of higher current interest rates and potentially rising values due to the possibility of falling yields later in the year may result in a rather ordinary, but potentially positive, year for bonds. Given the volatility in bond values over the past few years, ordinary is likely welcome. The probability of a soft landing for the economy is increasing. 2024 started with strong results for the key indicators for economic growth – jobs growth, consumer spending, and industrial production. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow. 

Stock Market

• Tech stocks, especially anything remotely tied to artificial intelligence, are again pulling the rest of the stock market higher, after a brief pause in April. There is always the fear that valuations get extended, with echoes of the tech bubble back in the year 2000. The most significant difference between the euphoria around the advent of the dot-com bubble and the current excitement in AI is earnings from actual products and services. Back in the late 1990 and early 2000, there were too many “companies” that had neither actual products nor services and instead only the promise of the possibility of the potential for outsized earnings based on web-based commerce. Certainly, there were some companies that survived and a few that thrived but too many that flamed out and were never heard from again. Now, many of the companies leading the charge on AI development are fulling functioning enterprises with successful businesses. There will still be winners and losers and the market will still have valuation corrections from time to time, but there is not likely to be the significant market washout that we saw during the year 2000 as the Tech bubble burst. 
• As May ends, we have completed the election primary season. In most election years, the election season is usually characterized as choppy and volatile as the market sorts out the potential policies on the wide variety of candidates for one or both political parties. So far, this year the stock market is having a better start to the year not just as compared to the typical election year, but in fact better than the average non-election year.
• The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve prescribing strong medicine in the form of higher interest rates, certain market sectors and the overall economy have endured some short-term side effects. Now that the Federal Reserve is projecting a pivot to lower interest rates sometime in 2024, the markets are behaving as if we are in an economic recovery which should mean leadership will broaden out toward stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks. Investors should focus on the longer-term path of the stock market and the economy and take advantage of any short-term correction by rebalancing to their appropriate risk profile.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.