May Market Recap: Stocks Close Marginally Lower in Turbulent Month | Personal Capital
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May Market Recap: Stocks Close Marginally Lower in Turbulent Month

May felt doom and gloomy for many investors, but when the dust settled, the U.S. total stock market was only marginally lower and global stocks and bonds finished green. As expected, the Fed raised interest rates by 0.5%. While at least two more similar hikes are anticipated this year, part of the late-month market rally was tied to a view that the Fed may be able to slow or pause tightening as we near yearend.

Signs of Recession?

The total U.S. stock market has been flirting with the technical definition of a bear market of a 20% decline, while the NASDAQ wandered well into bear territory in late April. This doesn’t tell us much on a forward-looking basis. In recent decades we have seen multiple instances where stocks happened to bottom at around down 20%, but also two deep bear markets. Higher volatility is often predictive of continued volatility, but it is not a great indicator of future direction.

Recessions are just as hard to predict as markets. It is possible history will show we are already in one. Markets often move in advance of economic data. Higher mortgage rates are starting to impact the housing market. Higher energy prices are taking a toll. Talk of hiring freezes is suddenly common in Silicon Valley. Having said all that, we do not see a steep excess of at-risk loans or of leverage in the financial system, so a repeat of a 2008 scenario is unlikely in our opinion. A shallow recession would not necessarily translate into a terrible forward-looking environment for stocks or bonds.

Market Volatility

Valuations are lower than at the beginning of the year. As of the end of April, the forward PE for the MSCI US Index was 18, and for the rest of the world it was around 13. These levels feel reasonable to us given current growth and interest rates. PEs do not accurately predict which direction stocks will go, but for long-term buyers, we think these levels should inspire confidence.

After falling in tandem during the first few months of the year, bonds are now showing lower correlation with stocks. U.S. aggregate bond market yields now sit close to 3%, and we expect bonds should be much more effective at reducing overall portfolio volatility looking ahead.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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