What to Keep in Mind When Interest Rates Rise
The markets in May were marked by ongoing volatility. Inflation, questions over the direction of monetary policy, and slower liquidity growth impacted equities. The ongoing debt ceiling negotiations cast a cloud over financial markets for much of May. Investors worried about the ramifications of inaction as the June 5 deadline loomed. Even after the president and House speaker reached an agreement toward the end of May, concerns persisted over whether Congress would pass the bill to lift the $31.4 trillion U.S. debt ceiling.
Tech shares and artificial intelligence stocks captured the attention of investors in May. One prominent chipmaker in particular saw its market capitalization briefly touch $1 trillion, with its stock up 36.0% in May. The Nasdaq was the clear winner in May among the benchmark indexes listed here, while the S&P 500 was able to eke out a monthly gain. The Dow, the Russell 2000, and the Global Dow finished the month lower. Year to date, the Nasdaq was well ahead of its 2022 closing value, followed by the S&P 500 and the Global Dow. The Dow and the Russell 2000 have fallen below their 2022 year-end values.
Investors saw the Federal Reserve hike the federal funds target rate 25 basis points in May. Whether the Fed raises rates again in June is open to conjecture. Several Fed officials have intimated that a pause may be appropriate, although inflation continues to far exceed the Fed's 2.0% target. The labor market remained tight with the addition of 253,000 new jobs in April, coupled with a rise in the number of job openings, which fueled rate-hike jitters.
In May, there was a clear line between winners and losers among the market sectors. Information technology (10.5%), communication services (6.3%), and consumer discretionary (4.0%) moved higher. The remaining sectors declined, led by energy (-8.9%), utilities (-7.3%), consumer staples (-6.3%), and materials (-6.0%).
Industrial production in general, and manufacturing activity in particular, expanded in May. Durable goods orders increased for the second straight month in April. The purchasing managers' indexes for both manufacturing and services rose in May, with manufacturing exceeding 50.0 for the first time in six months (a reading of 50.0 or higher indicates expansion).
Inflationary indicators showed price pressures remained somewhat elevated. Both the Consumer Price Index and the Personal Consumption Expenditures Price Index rose 0.4% in May.
Bond prices fell lower in May, with yields increasing over the previous month. Ten-year Treasury yields rose 18 basis points from April. The 2-year Treasury yield ended May at 4.42%, up 42 basis points from a month earlier. The dollar advanced against a basket of world currencies. Gold prices ended May lower.
Crude oil prices declined in May marking the fifth monthly decrease in the last six months. Oil prices have fallen due to an unusually warm winter in the United States and Europe, ongoing monetary tightening, U.S. bank failures, and China's slowing economic recovery. The retail price of regular gasoline was $3.656 per gallon on April 24, $0.235 higher than the price a month earlier but $0.451 lower than a year ago.
|MARKET/INDEX||2022 CLOSE||PRIOR MONTH||AS OF 05/31||MONTHLY CHANGE||YTD CHANGE|
|FED. FUNDS||4.25%-4.50%||4.75%-5.00%||5.00%-5.25%||25 bps||75 bps|
|10-YEAR TREASURIES||3.87%s||3.45%||3.63%||18 bps||-24 bps|
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Eye on the Month Ahead
Inflation and the Federal Reserve are likely to remain at the forefront for investors heading into June. According to the Federal Reserve, which meets in the middle of June, inflation remains accelerated, although another interest rate hike this month is not a certainty.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); http://www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
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