The S&P500 and the Dow Jones climbed back to within striking distance of all-time highs as May drew to a close. US New Home Sales figures seemed to suggest that the surge in US home prices has caused some buyers to walk away from newly built homes. President Biden released the details of a $6T budget that is sure to get push back from Republicans as the infrastructure debate looks to drag into June. Positive late-season retail earnings reports and corporate commentary indicated consumer strength has returned to 2019 levels and even accelerated into the current quarter. Inflation remained the overarching topic foremost in most investors' minds. The narrative didn't change, even though the Fed's preferred measure of inflation, core PCE, saw the April y/y number reach its highest level since the early 90s.
Australia's April jobs report showed the unemployment rate falling to 5.5% as the labour market continues to improve much quicker than expected. COVID flare-ups and the expiration of the JobKeeper program may see the numbers start to slow in the coming months. The ASX200 enjoyed a solid 2.3% gain in May, outperforming most other major global indices. Financials, Consumer Discretionary and Materials all lead the charge higher while IT and Utilities pulled back in the month. The Chinese Yuan broke out to its strongest level against the US Dollar in roughly 3-years.
May 2021 Summary:
- The US Federal Reserve calls inflation concerns' transitory', citing an uneven global recovery and supply bottlenecks
- Major US bourses made fresh all-time highs for the month, excluding tech indices
- The ASX200 enjoyed a 2.3% gain in May on a total-return basis, outperforming the S&P500 by 1.75%
- The US 10y yield gave up ground falling to 1.58% from a high of 1.70% in May
- WTI Crude traded to new 52-week highs
- Gold enjoyed a positive month, trading above $1,918/ounce
- Copper gained close to 5% in the month
- Iron ore futures traded up over 14.5% in May
- The AUD gained 0.23% against the Greenback in May aided by the strength in commodities and the dovish US Fed comments
- Global COVID-19 vaccinations reached over 2 billion in May
US Economic Overview
Initial and Continuing Jobless Claims fell to the lowest levels since the COVID pandemic began, although still well above pre-pandemic levels. The market is now squarely focused on the Friday, May Jobs report, which will be released on the 4th of June. The US Employment Situation Report for April (released the 7th of May) showed disappointing Growth, with the largest miss on record compared to market expectations. 266,000 jobs were added compared with the market expectations of 1,100,000, fuelling the debate about how unemployment benefits are becoming a problem for employers as employees hesitate to return to work. The April reading (released in May) of the US core personal consumption expenditures (ex-food and energy) rose 3.1% annualised, which is one of the Fed's core inflation gauges. The +1.2% jump from last month's 1.9% reading was the largest gain on record. Treasury yields broadly moved lower, spurred by central bankers' comments. The Reddit stocks recaptured investors' imagination led by AMC, which saw another round of dizzying gains sparking further debate over excessive risk-taking within financial markets.
US Equity Sector Analysis
Value names outshone Growth in May by over 350 basis points, continuing the trend seen so far in 2021. Since the start of 2021, Value has outperformed Growth by over 1200 basis points, mainly on the back of the economic re-opening trade theme and investors' concerns about inflation along with rising interest rates, as both tend to impact Growth stocks negatively.
US Earnings
Over 95% of the S&P500 names have now reported showing that over 85% reported a beat on EPS, and over 75% reported an upside revenue surprise. This puts Q1 on track for the highest percentage of S&P500 names to beat EPS estimates in 40 years. In summary, companies in the S&P500 reported 50.3% earnings growth and 10.8% revenue growth. Consumer Discretionary lead the way with 58%, closely followed by Energy 38%.
Market Volatility
Volatility measured by the VIX index spiked above the 28 level during the month of May as Treasury yields ticked higher and investors' concerns around inflation peaked. The VIX, also known as the market fear gauge, closed the month off its highest levels to settle at around 17.
Copper
Copper futures spiked the previous all-time high set in February 2011, closing the month up +4.3% and over 35% YTD. Given the solid run-up to these levels, which some technicians have noted as significant long-term resistance, it is likely to see some consolidation before the next move is seen. Copper is often sighted as a leading indicator of inflation.
Energy
WTI and Brent Crude enjoyed substantial gains during the month, both up close to 5%, similar to the advancements seen in other commodity markets. Fuel prices in the US (according to AAA data) show the national average price of a gallon of fuel is just over $3.00. The highest price paid on record was just over $4.10 recorded in mid-2008 when WTI Crude was trading at over $140/barrel.
Gold
Gold's lustre returned in May as the precious metal gained close to 8% on the month, trading back above $1,900/ounce for the first time since late 2020. Partly aided by a weaker USD and a buoyant commodity market, it should continue to stay supported in the short term.
Cryptocurrency
After trading above $59,000/coin on the 8th of May, Bitcoin gave up around -40% by month-end as various factors weighed on the virtual currency, including increasing concerns around potential government intervention and comments from Elon Musk around the environmental impact on Bitcoin mining. The Chinese government has also reportedly banned financial firms from providing cryptocurrency services.