May 2024 defied the adage "sell in May and go away," with the stock market staging a notable comeback after April's losses. The S&P 500 delivered a return of nearly 5%—a positive sign for investor sentiment. This upswing was driven by several key factors.
Technology stocks, which dominated headlines and performance in 2023, continued to be a focal point. May saw a resurgence in the technology sector, particularly in artificial intelligence or “AI” companies. This is evident by the 5.96% return seen in U.S. growth stocks for the month.
More importantly, May witnessed a welcome shift towards broader market participation. Outside of tech, sectors like utilities and communication services significantly outperformed—up over 9% and 6% respectively. Mid- and small-cap companies showed a strong rebound, posting gains of 4.39% and 5.04% respectively. Globally, foreign developed markets posted gains of 4.00% while emerging markets held steady, up 0.59%.
While the stock market experienced a positive turnaround, underlying concerns remain. Corporate earnings reports presented a mixed picture, with some companies failing to meet analysts' expectations. This underscores the need for investors to look beyond the headline-grabbing sectors.
The Federal Reserve's monetary tightening cycle continues to cast a shadow. The timing and extent of future interest rate hikes are primary concerns for investors, impacting market movements. May saw a slight decrease in bond yields, offering temporary relief as bond prices moved higher. The US aggregate bond index posted gains of +1.70% for the month. However, the trajectory of interest rates will continue to influence market volatility.
Despite the upbeat stock market performance, the economic picture remains nuanced. GDP growth forecasts for 2024 and 2025 are cautiously optimistic, albeit growth is expected to moderate in the next several quarters. Inflation, however, remains a persistent concern, potentially impacting consumer spending and corporate profitability. The Federal Reserve's actions will significantly determine the future course of inflation. The next Fed meeting will be held in the second week of June.
The labor market, however, provides a bright spot. Low unemployment figures indicate robust economic activity. This translates to increased consumer spending which can further bolster economic growth. However, rising interest rates could potentially dampen business investment, impacting long-term economic prospects.
May 2024 was a month of cautious optimism in the financial markets. Stock markets recovered from April's slump, but ongoing concerns regarding inflation and interest rates continue to influence investor sentiment. Diversification across asset classes, sectors, and geographies remains crucial for mitigating risk in this evolving economic landscape.