U.S. equity markets continue to be challenged by the prospect of recession, the effectiveness of recent Federal Reserve rate cuts, companies' downward earnings revisions, slumping consumer confidence, and elevated oil prices. Despite these headwinds, the U.S. equity market, as defined by the Standard & Poor's 500-stock index, rose 1.1% in May, and cut its year-to-date loss to 4.6%. After declining in each of the first three months of the year, the "500" has posted back-to-back monthly advances.
On a sector level, the action in May was broadly encouraging as nine of the 10 groups in the S&P 500 advanced on the month. The Information Technology sector was the month's big winner, rising 5.5%, while the Energy and Materials groups gained more than 3% each, despite the end-of-month decline for commodity prices. The Financials sector was the only decliner, losing 6.4% in May; it is now down 15% on the year. Only minor advances were experienced by the Consumer Discretionary and Industrials groups.
From a growth/value standpoint, defensiveness was not the watchword as the S&P/Citigroup Growth Index jumped 2.2%, beating the S&P/Citigroup Value Index's decline of 0.2%.
Finding the Subindustry Bull Markets
In addition to an above-average performance for the S&P 500 this month, 61% of the subindustries within the S&P Composite 1500 beat the market for the month, vs. the average 50% of subindustries that typically outperform the broader index on a monthly basis since 1994. There is always a bull market somewhere, as 13 S&P 1500 subindustry indexes each rose by more than 10% for the month, led by Coal & Consumable Fuels (21.3%), Construction & Engineering (17.9%), Aluminum (16.0%), Brewers (14.6%), and Wireless Telecommunication Services (13.1%).
Below the surface, we find even more encouraging performances, as the S&P MidCap 400 and SmallCap 600 indexes advanced 5.1% and 4.3%, respectively, in May. Sector leadership was concentrated in Energy, Industrials, and Information Technology. Only two sectors—Consumer Discretionary and Financials—posted minor declines. Year to date, the S&P 500 is down 4.6%, small-caps are flat, and mid-caps are up 2.8%.
Looking at the S&P 500's monthly average performances since 1945, while May ranks as the eighth-best performing month of the year, June ranks No. 9, and has recorded an average advance of only 0.2%.
History Predicts More Headwinds to Come
What about the stock market adage "Sell in May, and then walk away"? If history is any guide, it continues to have merit. Since 1945, the S&P 500 gained 7.1% from Nov. 1 through Apr. 30, but only 1.6% from May 1 through Oct. 31.
The negative signal from this year's "January Barometer" (the S&P 500 fell 6.8% in January of this year, which typically indicates a challenging remainder of the year), backs up what history shows: We may have more headwinds to deal with in the months ahead.
Even though past performance is no guarantee of future results, when the S&P 500 fell in January, which has happened 22 times since 1945, it posted an average decline of 2.1% in the subsequent May through October period, vs. the average 1.6% advance for all May-October observations over the past 62 years.
What's more, following a decline in January, the S&P 500 fell 13 times and posted subpar advances on two additional occasions. In other words, the market posted disappointing results 68% of the time. Incorrect signals came in 1948, 1968, 1982, 1984, 2003, and 2005 when the S&P 500 gained 3% or more in the May-through-October periods.
Rates Unlikely to Change in June
This June, investors will wonder if the expected recession has been postponed or canceled (S&P thinks it has been postponed). The May payrolls data, to be released June 6, are projected to show a 60,000 loss in U.S. jobs, plus an increase in the unemployment rate to 5.1%. Wall Street will continue to monitor commodity costs and see if both the core consumer and producer price index reports for May remain above the Fed's comfort zones—we see year-over-year growth rates of 2.3% for core CPI and 2.9% for core PPI.
As a result, the Fed will likely leave rates unchanged when it concludes its policy meeting on June 25. We believe the tone of the meeting's statement will indicate recession remains the central bank's primary consideration, but inflation concerns may cause the Fed to begin raising rates by mid-2009.
Finally, investors will look for signs that the tax rebates have begun to boost consumer spending.
Industry Momentum List Update
Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).