May was a reminder that markets can fluctuate significantly on a day-to-day basis
The stock market had another tumultuous month with major indices falling deeper into correction territory before rebounding and ending the month flat. The S&P 500 and Dow ended the month nearly unchanged while the Nasdaq declined another 2%. Among the major indices, the S&P 500 continues to be in correction territory, having declined 13.3% year-to-date, and the Nasdaq in bear market territory, having lost 22.8%. The VIX index of stock market volatility fell to 26.19. Cryptocurrencies also had a challenging month with Bitcoin declining another 17% to $31,788. What trends drove these market swings?
Here’s what investors need to know:
- The S&P 500 briefly touched bear market levels. This occurred on an intra-day basis on May 20, but the index then recovered a bit, ending the day above these lows. Since then, the market has rallied over 8%. It is still down 13.9% from its all-time high in January, while the Dow is down less at 10.4%.
- Rising inflation impacted company earnings announcements. The market’s concerns over inflation have shifted from supply chains and the Fed to its impact on earnings. There are signs that the highest inflation rate in four decades is now impacting consumer spending and business profitability. Tech sector stocks were hit especially hard over signs that advertising spending declined in the first quarter.
- Higher prices are affecting consumers and businesses. Gasoline prices continue to rise and average $4.60 for regular unleaded across the country. Mortgage rates also jumped to 5.3% on a 30-year fixed, up from 3.1% a year ago. New data shows that new home sales fell to around their 2020 lows in April. However, the Consumer Price Index also declined slightly for the first time since August of last year. Only time will tell if the worst is behind us.
- Economic growth slowed more than expected in the first quarter of the year. This is based on a revision to gross domestic product (GDP), a measure of economic activity, which showed that the economy shrank by 1.5% in the first quarter compared to the fourth quarter of last year due to inflation and the war in Ukraine. Whether there will be a recession is still the subject of debate among economists and depends on whether inflation will naturally calm later this year.
- As expected, the Federal Reserve accelerated its pace of rate hikes. The Fed announced after its meeting on May 4 that it would raise rates by 0.5% (half of one percent) rather than the typical 0.25% amount. Market measures suggest that the Fed could do this at least a couple more times at coming meetings. The Fed also detailed a plan to reduce the size of its balance sheet by allowing the Treasury and mortgage bonds it holds to mature, or “run off.” By not buying as many new bonds, this could effectively push interest rates higher.
Chart of the month: Mortgage rates have jumped considerably this year, after declining for decades. This chart shows the average rate on a 30-year fixed rate mortgage across the country.
Patience is a virtue when inflation looms and markets sink
Clearnomics researchers believed that staying invested and focused on the long run are the best ways to navigate these environments. Clearnomics believes this is especially true in inflationary environments in which the value of cash is slowly eroded as prices rise. The practice of investing can help to generate returns over the long run that offset these inflation trends. However, this requires patience, especially as market and economic uncertainty continues to weigh on investors’ minds.
Sources: Clearnomics, Freddie Mac, Standard & Poor’s, Nasdaq, CBOE, and Bloomberg as of June 2, 2022.