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Financial Markets ended the month of May with mixed results.  A prominent rotational trade was again present throughout the month.  Inflation was top of mind and debated by investors as some economic data fueled concerns of a systemic increase in goods and services prices.  In Washington, politicians continued to discuss the inputs and size of an infrastructure spending plan while the Federal Reserve maintained its current monetary policy stance.  First-quarter earnings season finished with stellar results but mixed price action.  Cryptocurrencies were extremely volatile and settled at levels well below their most recent highs by month-end.

The S&P 500 gained 0.55% for the month, the Dow was higher by 1.93%, the NASDAQ fell 1.53%, and the Russell 2000 inched out a 0.11% increase.  Developed international markets increased by 3.48%, while emerging markets gained 1.65%.  Despite all the worries about inflation, the US Treasury yield curve flattened.  The 2-year note yield fell two basis points to 0.14%, and the 10-year bond yield dropped five basis points to 1.58%.  Interestingly, gold often thought of as a hedge against inflation, increased 7.5% or $134.30 to close at $1902.20 an Oz.  Oil prices continued to rise, gaining 4.5% or $2.81 to close at $66.32 a barrel.

 

The global vaccination efforts continued in May, and we continued to see significant shots being put into the arms of Americans and Europeans.  India continued to struggle with its efforts and saw infection rates and deaths soar but did see substantial progress towards the end of the month.

The closure of the global economy has disrupted some supply chains, and we are starting to see the ramifications of these disruptions.  Inflation measures such as the CPI, the PCE Price Index, and inflation expectations in sentiment indicators all ticked higher in May.  Used Cars, Rental Cars, Airfares, and Hotel room prices led these price data sets higher.  The debate on whether these price increases are systemic or transitory was a considerable influence on the markets in May. If you believe what the Federal Reserve told us at their May meeting and the action seen in US Treasury bonds, it currently appears transitory.  If you look at prices in the commodity complex such as Gold, Oil, and industrial metals, perhaps it seems a little stickier.  Wages are a significant variable in the inflation equation, but the labor data in May was blurry.  For instance, the April Employment Situation report showed just 266k non-farm payrolls created; expectations were for 1 million jobs to be made.  We also saw the Unemployment rate tick higher to 6.2%.  On the other hand, we saw Initial Claims and Continuing Claims trend lower.  The tepid increase in jobs has some calling for the end of the enhanced unemployment benefits, which some argue keep perfectly able workers from going back to the workforce.  Wall Street will continue to ascertain inflation, and it will certainly significantly influence the markets in the coming months.

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