The major indices continued their separate trends for 2023 in the month of May. The S&P 500 crept up 0.4% as its heavily weighted tech shares dragged the index to an 8.9% gain for the first five months. The tech-focused Nasdaq continued its torrid pace, rising another 5.9%, good for a 21.2% gain for 2023. The Dow trailed profoundly, dropping 3.2% for the month and -0.7% for the year.
To emphasize how top heavy the S&P 500’s performance has been, the Wall Street Journal recently reported that the index would be negative without the gains of the top seven tech giants (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla).
The tech sector has kicked off a hype-cycle over generative artificial intelligence, or “AI” for short. AI’s potential dominated headlines in May. Many on Wall Street and Silicon Valley are comparing the potential of AI to be as revolutionary as the internet in the 90’s and mobile phones during the 2000’s and 2010’s. As with all tech cycles, stock prices will ultimately only reflect the monetization and productivity increases of the technology, not the hype.Further clarity of the market’s winners and losers is found by reviewing growth vs. value. The Russell 1000 Growth Index gained 4.6% for the month, while the Russell 1000 Value Index lost 4.0%.
While the equity indexes have climbed, debt markets are creaking under the strain of rising interest rates. As we have written in previous months, the yield curve is steeply inverted, a signal that a possible recession is in the cards. More recently, credit stress is showing up as borrowing costs for companies have risen substantially, as reflected in credit spreads between corporate bonds and treasuries.Commodity prices have also continued to see downward pressure, providing bears another negative leading indicator and evidence that economic activity in China is weaker than expected.
Five months into the year, the market has been able to shrug off negative data points that point to a recession in favor of falling inflation, a resilient US consumer and AI growth hype.
Where do we go from here? Wall Street forecasters can be found across the spectrum.
Bears point to weak market breadth, falling M2 money supply, two straight quarters of Y/Y earnings declines, and historically high equity valuations in the face of a possible economic downturn. These trends are not likely to be reversed on the account of AI hype. Core inflation remains sticky as well, which could lead to further tightening by the Fed after a possible June pause.
Many in the bullish camp have a soft landing as their base-case scenario, pointing to a bottoming housing market, tight labor market, stronger-than-expected consumer, disinflationary trends, and a Fed that is near the end of their drastic tightening cycle.
We continue to be diligent on monitoring and analyzing macro data to protect and grow your portfolios. New inflation numbers (CPI), PPI, and the FOMC rate are due out in two weeks.
We hope your summers are off to a great start. Enjoy the time with friends and family as the days turn warmer.