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May 2024 Monthly Commentary

May 2024 Monthly Commentary

Piton May Market Review

Despite mixed macroeconomic signals last month, broad markets delivered positive total returns for investors. Persistent inflation data and slightly lower economic figures have led to a more hawkish FOMC. Nonetheless, market participants still anticipate an easing environment at some point in 2024. The stock markets showed signs of shifting leadership, while bond prices rallied despite a historically large supply of new issuance. Markets were highly sensitive to data points, even as other risk factors emerged. Liquidity issues in commercial real estate have resurfaced, extending beyond banks. The U.S. Presidential election process has had some early impact on prices, especially with former President Trump’s conviction on multiple counts of falsifying documents. Geopolitical developments, particularly in Israel, continued to make headlines. Additionally, the strength in commodities such as copper attracted attention.


The U.S. equity market remained dominant in asset allocations. The S&P 500 index rose by 4.96%, led by the Nasdaq’s 6.98% gain. The Dow Jones Industrial Average, despite some strong trading days, finished up 2.58%. The energy sector was the only sector to record a negative total return for the month. The tech sector led gains once again, rising almost 10%. Interestingly, utilities, a historically defensive sector, also rose dramatically, up 8.46%.


Bond yields experienced significant volatility, falling over 30 basis points in the first half of May before retracing much of that decline in the latter half of the month. Longer duration bonds performed better than shorter tenors. Treasury notes saw elevated volatility as large new issuances were not well received by investors. All three “Dutch” treasury auctions for new noted “tailed” slightly, indicating investors demanded higher yields for the new bonds. Credit sectors managed to outperform, despite a large month of primary issuance. Securitized sectors, including US mortgage-backed securities (MBS), also posted better total returns than the treasury market. The municipal bond market experienced a “reversion to fair value” as new supply pressured the sector to perform slightly negative for May. While mixed data drove interest rate volatility daily, the strong total returns in the bond market were driven by enticing yields, the prospect of a stable to easing FOMC policy, and possible “walls of worry” affecting risk market valuations.


Data Recap

May began with a May 1st FOMC meeting where Fed Chairman Powell indicated that inflation must continue to decline before easing restrictive policies, but suggested a rate hike was unlikely. While this guidance pushed economists’ forecasts further out, it set a high bar for any tightening measures.


Last month’s economic data indicated a strong, yet decelerating economy:

  • Non-farm payroll data slightly missed expectations, and average hourly earnings ticked down marginally.

  • The service sector economy and service sector employment, as reported by the ISM services index, slowed.

  • Consumer confidence data was mixed: the University of Michigan’s consumer confidence sentiment dropped to 67.4 from 77.2, while the Conference Board’s consumer confidence rose more than expected in May.

  • Manufacturing activity slowed according to most regional reports.

  • The housing market, affected by inventory shortages and high rates, slowed with the NAHB Housing Market Index falling to 45 from 51. Housing starts and building permits were below expectations, and both new and existing home sales declined.

  • Retail sales figures were lower than anticipated.

  • First-quarter GDP remained at 1.3%.


Inflation data, while mixed, remains highly sensitive to global markets and Federal Reserve commentary:

  • Prices paid in the manufacturing and services sector increased last month.

  • Unit labor costs were significantly higher than expected in Q1 2024.

  • Core PPI data slightly exceeded expectations for the month, while CPI data matched forecasts.

  • PCE data released at the end of May was precisely in line with estimates.


As we move into the summer months, economic and inflation data will likely remain highly sensitive for markets as the FOMC seems more divided on the 2024 outlook. Additional risks could also impact markets - the prolonged period of higher rates is beginning to stress sectors like commercial real estate. Last month, reports emerged about the first AAA tranche of a CMBS issue experiencing credit impairment. Starwood Capital’s large commercial real estate fund implemented liquidity gates to manage outflows.


Additionally, the upcoming November Presidential election is expected to impact markets sooner than usual. Last month’s court case involving former President Trump offered a preview. This election will influence fiscal policy decisions, global relationships, and even the Federal Reserve’s composition. Market reactions could begin as early as the scheduled debate on June 27th.

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