Fidelity Bank - Wealth Management
After a significant decline of 8.72% in April, the S&P 500 eked out a positive gain of 0.18% in May, however; there was substantial intra-month volatility. The S&P 500 was up as much 3.48% and down as much as 6.00% on a total return basis in the month of May. Having previously signaled its intent to drive down inflation, the Federal Reserve (Fed) increased rates by 50 basis points or 0.50% in May. With the Fed signaling its intentions, this hike was in line with market expectations and did not prompt an additional jump in yields. The futures market is now pricing in two sequential 50bps hikes in June and July. As fears of decreased growth took hold in markets, uncertainty regarding rates hikes beyond July caused increased volatility in markets.
Although both are at levels not seen in 40 years, CPI and PCE eased a bit in the May report producing readings of 8.3% and 4.9%, respectively. While it is too early to tell if inflation has peaked, 75 bps of rate hikes and continued inflation saber rattling from the Federal Open Market Committee (FOMC) committee members has certainly tightened financial conditions.
The average 30 Year mortgage rate jumped to 5.57% in early May while it ended the month at 5.35%. Mortgage rates on average are up 2.08% from year end. From a mortgage payment perspective, those rising rates are putting the squeeze on new borrowers’ wallets. The monthly mortgage cost of the median sales price home, with 20% down, has risen from $1,122.38 in August of 2020 to $1,836.89 as of March 2022, a 64% increase!
Looking at the inflation adjusted real median sales price and the real 20% down mortgage payment relative to the real median income, it is apparent that low interest rates have helped keep homes affordable from a payment basis. The median sales price of houses sold has skyrocketed to 6.35X the real median income, a more than 2.3 standard deviation event. However, the real annual mortgage payment is now 32% of real median income in line with the average with data going back to 1980. In August 2020, the annual mortgage payment was only 21% of the real median income, which is a -1.4 standard deviation event.
With a volatile month of May, U.S. large-cap stocks ended the month slightly higher by 0.18%. However, this does not paint the entire picture for US markets as there has been significant styles differences on a year-to-date basis. Large Cap Growth Stocks felt most of the pain falling by -2.32% (YTD: -21.88%) and while Large Cap Value Stocks gained 1.94% (YTD: -4.52%). Diving deeper to a sector perspective, it is those value-oriented sectors that have significantly outperformed; Energy was up 15.80%, Utilities were up 4.32% and Financials were up 2.73% in May. Consumer Staples and Consumer Discretionary sectors were the biggest laggards down 4.12% and 5.17% in May. Inflation continues to steal purchasing power from consumers and rising prices, input costs, and wages have put pressure on the top and bottom lines of many firms.
In international markets, the US dollar weakened for the first time this year, giving US investors in these markets a bit of a tail wind. The MSCI EAFE Index was down -0.20% in local currency, however, the conversion to US Dollars increased that return to 0.75%. A similar theme in Emerging markets took place, the local currency return was 0.17% and the conversion to USD raised that return to 0.44%.
For context, over the past year the US Dollar Index, which measures the US Dollar versus major international currencies, has risen by more than 13%. This has been a significant headwind for US investors in international markets.
U.S. investment-grade bonds posted their first positive monthly return since November of 2021 with a May return of 0.64%. The yield curve fell in the 2–10-year maturity tenors with rate declines ranging from 9.1 to 16.1 basis points. However, year-to-date, with yield rising across the maturity spectrum, investment-grade bonds are down 8.92%. The good news for bond investors is that going forward the income component of their total return has more than doubled over the past year as the yield to worst of the Bloomberg US Agg Bond Index has risen to the 3.38% as of the end of May.
Spreads were volatile during the month. At one point, Investment Grade spreads were higher by 15 basis points, and High Yield spreads were higher by 88 basis points. Both fell toward the months end. Investment grade spreads ended the month lower by 6 basis points (1.37% over 10-year Treasury), while High Yield spreads (4.23% over 10-year Treasury) ended the same period higher by 9 basis points. From a return perspective, Investment Grade Corporate Bonds added 0.93% as rates decreased modestly and High Yield Corporates gained 0.25% despite a modest increase in spreads to the 10-year Treasury Note.
In international Fixed Income, a weakening US Dollar added to Emerging Markets Debt in May, helping the asset class return about 1.75%.
Commodities continued a strong 2022 as the Bloomberg Commodity Index returned 1.52% in May, increasing its year-to-date return to 32.74%. Higher than expected inflation and the fallout from the Russian invasion of Ukraine continues to drive returns in this asset class. Energy continues to be the best performing of commodity sub-asset class, with May returns of more than 10% and year-to-date returns greater than 85%. Many energy-related products (WTI Crude Oil specifically below) are currently in a significant state of backwardation, which is commodity futures prices are trading at a lower price in the future than they are today. Backwardation can potentially be a considerable tail wind for total returns for many commodity investors as spot and future prices converge overtime.
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May 2022 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 5/31/2022. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.