The equity market witnessed a sector rotation in May from Utilities to Technology stocks as investors took on greater risk on a market backed by a strong labor market. The S&P 500 Utilities index was down 6% while the Nasdaq composite index was up 6% for the month. Utilities fell due to the probability of higher interest rates for longer time periods as the Federal Reserve factors in a low unemployment rate at 3.7% with 339,000 jobs added in May. Although it is worth noting 65% of economists surveyed by Bloomberg currently predict a “looming recession” citing leading economic indicators including the inverted yield curve, the economy continues to expand defying expert expectations.

Risks to the market and the economy in May included:

  • Congress not agreeing with President Biden to raise the debt ceiling necessary to pay government bills including their debt payments
  • Oil prices as we head into the summer driving months
  • The war in Ukraine as the Ukrainian military prepare for a counter-offensive

Although the probability of a debt ceiling raise not being achieved was always low due to the severe impact it would have on the economy, investors still had to price in this scenario that a deal would not be achieved. This created a lot of noise for the market. As investors are focused on the inflation rate, the price of oil is a critical factor as it impacts the cost of transportation and the final prices of many goods.

WTI spot oil continued its trend downwards last month. This bodes well for the stock market except for the energy sector. The Ukrainian war has reached a standstill with fears of escalation into a broader conflict now less probable than last year. Overall, major risks to the economy did not materialize in May as the Volatility Index (VIX) decreased and investors became more risk-on investing in technology stocks.

After several big Technology companies reported layoffs earlier in the year, recent earnings reports have shown their resiliency. Apple beat analyst expectations with strong iPhone sales globally as world-wide demand for their products remains robust. Nvidia, a Graphics Processing Units designer based in California, also beat analyst expectations as Artificial Intelligence processing boosted their customer demand and their stock market capitalization approached $1 trillion.

In summary, there were many monitoring points in May as the Federal Government debated the debt ceiling increase. Technology companies rallied due to strong earnings as they continue to beat expectations. Utilities on the other hand struggled as their dividend yields are often compared to long term bond yields. Long term bond prices also fell as their long term interest rates increased in May.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.