What a difficult month May was for investors. The Federal Reserve hiked interest rates a full one-half percent (the highest rate hike in 22 years), year-over-year inflation hit 8.3%, and U.S. stocks—especially technology and growth stocks—experienced their steepest one-day sell-off since the onset of the pandemic in early 2020.
Yet despite everything, returns were largely positive for the month—at least for well-diversified portfolios. U.S. stocks¹ finished the month down slightly (-0.13%), pulled down mostly by growth stocks² (-2.30%). In contrast, factor-based portfoliosᶾ—those that diversify far beyond just growth stocks—delivered positive returns to investors in May (+0.40%), propelled mostly by value stocks⁴ (up 1.94% for the month). Globally diversified portfolios where buoyed by allocations to non-U.S. developed⁵ and emerging market stocks⁶; both posted positive returns for the month (+0.89% and +0.47%, respectively). Even bonds posted positive returns despite the central bank’s big hike in interest rates, underscoring the difficulty of predicting market returns and the importance of broad asset class diversification. The Barclays U.S. Aggregate Bond and Bloomberg Global Aggregate Bond indices returned +0.64% and 0.27%, respectively.
Reading the proverbial tea leaves to divine the future is always a difficult exercise, but May nevertheless provided some interesting leaves to read. Asset valuations have come down significantly (the S&P 500 now trades at about 17x earnings, close to its 25-year average); earnings growth remains respectable; and there are some early signs that inflation may finally be beginning to cool. But now is no time to be pollyannaish about the future. Red-hot inflation (especially in energy prices) continues to weigh heavily on consumers, mortgage rates have nearly doubled since the end of last year (which suggests looming declines in real estate prices), and, beginning in June, the Federal Reserve will begin quantitative tightening (“QT”), a policy whereby the Fed seeks to raise interest rates by allowing bonds it owns to “roll off its balance sheet” (jargon for simply allowing bonds that it owns—about $9 trillion in total—to mature without reinvestment of the proceeds in new bonds).
We live in challenging times. The global economy is currently dealing with a wide range of stressors—the lingering effects of a global pandemic, a tragic and disruptive war in Ukraine, and highly disrupted global supply chains to name only a few. A central purpose of markets is to digest new information into the prices of everything from stocks, bonds, and currencies to real estate, commodities, and digital assets. Rather than try to predict winners and losers or time market movements, we believe the best approach for investors is to maintain a globally diversified portfolio that reflects their personal risk tolerance and is designed to achieve their long-term financial goals.
1 Russell 3000 Index
2 Russell 3000 Growth Index
3 MSCI USA Diversified Multiple Factor Index
4 Russell 3000 Value Index
5 MSCI EAFE Index
6 MSCI Emerging Markets Index
All data sourced from YCharts, Inc.
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