US Stocks
The equity market followed up a very strong April with modest advances in May. The rally just keeps on chugging. Between rising stock market prices and a red-hot housing market, Americans are in good shape financially considering the events of the past 15 months. The S&P 500 rose 0.6% while the Dow Jones Industrial Average climbed 1.9%. Technology stocks struggled early in May, and the Nasdaq Composite finished down 1.5%. Small cap US equities, as measured by the Russell 2000 index, were up 0.3%.[i]
May US Stock Market Performances
The theme so far in 2021 is the shift away from the once high-flying technology companies toward old-school value and cyclical stocks. Zoom, Teledoc, and Peloton have yielded to blue chip names like Ford, General Electric, and Bank of America. We see this rotation often in the market – traders move their bets from one area to another always in search of the new trend.
Over the last three months, commodity-related niches have done very well given the huge jump in many raw materials prices. I’m sure you’ve noticed. Who can forget the headlines lumber futures made earlier this month? Thankfully for those looking to buy a house soon, lumber is cooled a little bit of late.
What else has been working? Boring old bank stocks. The Financials sector is up nearly 20% over the last three months. In the doldrums is the Technology sector which is up just 6% since the end of February. For our clients, we have positioned our portfolios in a diversified way so that we are not dependent on the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google). In fact, we welcome a rotation to value stocks.
International Stocks
Speaking of diversification, we believe in owning some international stocks. Foreign equities held their own in May, actually beating the US market modestly. The Schwab International Equity ETF (SCHF) was up 3.6%. Ex-US small caps and Emerging Markets were higher by more than 2%.[ii]
China suffered significant declines from February through mid-May but then bounced back to close out the month. What caught the eye of traders was some of the price-action in Europe. Many European funds notched all-time highs by the end of May. Elsewhere, believe it or not, the India stock market has been one of the bright spots despite COVID-19 continuing to ravage the world’s second-largest country by population.
Fixed Income
Bond investors didn’t have much to fret about in May after a tough start to the year. Interest rates steadied around 1.6% on the US 10-year yield, so bond funds were roughly unchanged last month. All eyes remain on the latest economic reports regarding the inflation outlook. The narrative right now is that inflation will run relatively high over the coming months, but should then ease back once supply chains are replenished with materials and workers. When inflation calms down, interest rates should find their footing.
An upside to higher interest rates is that investors earn better rates of return on bond mutual funds as old, low-yielding holdings are replaced with higher interest rate bonds.
US 10-Year Treasury Yield – Steady Since March
Commodities
Raw material prices climbed again during May. Economists and traders look to the Commodity Research Bureau’s (CRB) index for a gauge on the latest price trends.[iii] Last month featured a surge in raw materials prices to start the month, then a modest decline before ramping higher in the last 10 days. Performing the best was coffee futures – sorry to tell all you Starbucks fans.[iv]
Silver and gold futures rose as well, closing 8% higher and boosting the returns of precious metal mining companies that have been long-suffering relative to the broad stock market’s bull run since 2009.
Oil and gasoline prices advanced during May, too. Just in time for summer driving season. AAA predicted that 37 million people would be traveling over the Memorial Day weekend, a 60% climb from a year ago, but still 6 million fewer than before the pandemic.[v] We are getting there, but many folks remain apprehensive about a 100% return to normal.
CRB Commodity Price Index – Highest Since in Six Years
Housing Market
Everyone’s favorite phone app back in January was Robinhood. In April it was Coinbase. Maybe now it’s Zillow. US home prices continue to climb unabated. In Michigan, the median price of a house is up a whopping 11.5% from this time a year ago, according to Zillow.[vi] The index has more than doubled from a decade ago. Nationally, the S&P Case Shiller Home Price Index is up 13.2% year-on-year.[vii]
With surging home prices and low interest rates, homeowners suddenly have considerable equity and persistent cheap borrowing costs. It’s a great time if you purchased a property in the early to mid-2000s. For those on the hunt right now, it’s a tough slog with intense demand and bidding wars. Freddie Mac reports the average 30-year fixed-rate mortgage is back below 3% at 2.95% while a 15-year mortgage is 2.27%.[viii]
Michigan Home Prices
Crypto
The housing market looks like child’s play compared to the happenings in the world of cryptocurrencies. Bitcoin traders navigated a decline from $65,000 to $30,000 during May while smaller coins like Ethereum and Dogecoin dropped even harder. Investors looking to play their hand in this volatile space in April were greeted with a rather rude introduction in May.
That’s the tough thing about “investing” in cryptocurrencies. Do they have a future? Probably, but staying invested through these massive price declines is often too difficult for most investors to stomach.
Think of it like this: imagine buying the Amazon IPO in May 1997. You’d think you won the lottery doing that since the company is worth nearly $2 trillion today! Not so fast. Do you think you would have had the gusto to hold on to the shares during the bleak moments of 2001 when the stock price was down 95% at one point? We’ve seen similar massive declines in Bitcoin over the last several years. As of this writing, Bitcoin is down a whopping 44% from its April high.
Bitcoin’s Historical Declines[ix] – Not for the Faint of Heart!
Retirement Changes Ahead?
Financial advisors (and the IRS) have been busy over the last 15 months dealing with a multitude of historic events, including landmark tax law changes. The retirement landscape is shifting under our feet. We at TFC work hard to ensure your plan is on track. There could be a new round of updates to retirement rules such as IRA contribution amounts, small business retirement plans, and required minimum distributions. We will be sure to stay on top of the latest legislation news so that you receive the best guidance.
The Point
Financial markets continue to climb and the housing market remains on fire as the economy reopens. Restaurants are busier (and short-staffed), unemployment benefits may dwindle in the coming months, and you might be commuting to the office again before you know it.
There are pluses and minuses, but I think we can all agree that we are ready to put the pandemic in our rearview mirror.
Maybe you feel if you can make it through the last 15 months, you can survive just about anything. We take an optimistic view, but we also know that there are always risks we must plan for, and uncertainty never goes away. We urge clients to keep a long-term focus and to regularly review their financial plan with us.
We’ll talk soon!
[i] https://stockcharts.com/freecharts/perf.php?$SPX,$INDU,$COMPQ,IWM&p=1&O=111000
[ii] https://stockcharts.com/freecharts/perf.php?ITOT,SCHF,VSS,SPEM&p=1&O=011000
[iii] https://stockcharts.com/h-perf/ui?s=$CRB&compare=DBC&id=p90681878200
[iv] https://finviz.com/futures_performance.ashx?v=18
[v] https://newsroom.aaa.com/2021/05/memorial-day-holiday-travel-to-rebound-to-more-than-37-million/
[vi] https://www.zillow.com/mi/home-values/
[vii] https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-us-national-home-price-nsa-index/#overview
[viii] http://www.freddiemac.com/pmms/
[ix] https://app.koyfin.com/chart-template/4ce314d2-302d-4c5c-9b79-8ac29ada19b4/fx-yom8ay
Photo by Shawnn Tan on Unsplash