KEY HIGHLIGHTS
- The S&P 500® was up 0.25% in May, bringing its YTD return to 8.86%.
- The Dow Jones Industrial Average® dropped 3.49% for the month and was off 0.72% YTD.
- The S&P MidCap 400® decreased 3.36% for the month, bringing its YTD return to -0.98%.
- The S&P SmallCap 600® was down 1.94% in May and had a YTD return of -2.73%.
MARKET SNAPSHOT
The S&P 500 stayed in its two-month trading range then broke above it at month’s end, buoyed by the debt ceiling and spending agreement. The market did not seem to appreciate the deal, but the alternative could have been disastrous, as it returned to the 4,200 level, reaching 4,231 intraday (the prior 4,200 close was in August 2022); it closed the month under that point, at 4,180. The May 0.25% gain was seen as a win, given that the regional banking and debt issues seemed to be behind us. Volatility remained unusually low, especially given that earnings reports had almost finished for Q1 2022, which ended nicely, up 4.8% over Q4 2022 (or to be balanced and fair, 1.0% below where the estimate was at the opening of the quarter—before it was lowered). Debt ceiling issues dominated the headlines, as earnings guidance and a potential “selective” or “soft” landing dominated the trades, and recession started to be assigned based on major industry group classification.
At the bar, however (at least the few I still get to), the “kids” (30- or 40-somethings) seemed to be talking more about AI potential, along with the usual grand vision of tomorrow and its associated M&A hype. From my perch, that became self-evident when online learning and study tool company Chegg (CHGG) declined 48% for the day (-65% YTD) earlier in the month, as it warned that students appeared to be drawn to AI (ChatGPT) and its subscription rates (and therefore business) declined. If they weren’t studying those trades and missed out, the other side of AI showed up in Nvidia (NVDA), as it easily beat estimates and increased its forecast, citing current and expected AI sales, with the shares up 24% the day after the earnings and guidance release (up 159% YTD); it joined the trillion-dollar club for a moment but closed the month below it. At the bar, “they” spoke of the potential and their searches for AI in corporate text, with the conclusion that this could be the start of great opportunity (and profits). In “our” conversation, we reminisced about the Information Technology takeoff in the late 1990s, when the sector posted a 77.6% gain in 1998 and 78.4% gain in 1999, to be followed by -41.0% in 2000, -26.0% in 2001 and -37.6% in 2002, with the five-year net return being -13.6% (with many fortunes and bankruptcies). We found ourselves mostly agreeing that it was the start of public AI investing, but that the true intelligence was still in differentiating real product advancement and use, as well as integration into existing processes.
At this point, to me, it seems that system learning via repetitive observations to improve processes, better quantify results and improve analysis of risk/reward would be a gift, empowering many, improving efficiency and maybe increasing the standard of living; it may also bring layoffs, business failures, misinformation and social complications.
May ended with the House approving the debt legislation (314-to-117), which is expected to close the deal in the Senate and then get a presidential signature, all of which needs to be done before the current June 5 “X’ date (or another stop-gap will need to be created).
After that, the FOMC June 13-14 meeting will be the prime discussion point, as futures moved on May 31 to favor a pause (65% from the prior day’s 33%), even though much of the data supported another 0.25% interest increase; throughout the futures seesaw, most of the Street held to their pause button view. At this point, a pause or even an increase may not disrupt markets as much as it would have a month ago, if Powell’s commentary can make the case and indicate that the eventual end of increases is coming, as well as the start of cuts. The Street is still looking for a Q4 2023 cut, as futures quantify it at a 55% chance.
The market focused on the debt ceiling issue, with the implied change to government spending. It moved past the banking situation, as earnings results and forecasts pointed to a shifting and selective consumer (at a time when government spending is unclear). The Street still saw a Fed pause in interest rate increases at the June 13-14, 2023, meeting, with most of the Street still expecting a Q4 2023 interest rate cut.
