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Despite the longstanding market adage “Sell in May and go away,” global stock markets continued to march higher for the month. Foreign stocks led the way. Developed international stocks (Vanguard FTSE Developed Markets ETF) gained 3.6%, and emerging-market stocks (Vanguard FTSE Emerging Markets ETF) returned 1.7%. In the United States, the S&P 500 Index was up just 0.7% and the small-cap Russell 2000 Index blipped up 0.3%.

Underneath the market surface, cyclical and value stocks regained their leadership over defensive and growth names, and by a wide margin. The top-performing sectors in the S&P 500 were energy, financials, materials, and industrials. Meanwhile, the consumer discretionary, utilities, and technology sectors all had negative returns. The Russell 1000 Value Index rose 2.3% versus a 1.4% loss for the Russell 1000 Growth Index. The divergence was even sharper among small-cap stocks with the Russell 2000 Value Index gaining 3.2% compared to a 2.8% loss for small-cap growth. The pattern was similar, although less extreme, between the international value and growth indexes.

chart showing benchmark stock returns for may 2021

In the bond markets, the 10-year Treasury yield ended May at 1.58%, just a few basis points below where it started the month. The core bond index produced a modest 0.3% gain, while the intermediate-term Treasury ETF rose 0.4% (iShares 7-10 Year Treasury Bond ETF). Our actively managed bond funds outperformed the core bond index for the month, and floating-rate loan funds outperformed as well.

On the macroeconomics front, the big news continued around inflation, with both the CPI and PCE reported numbers (core and headline) for April coming in higher than consensus expectations. The financial market reaction was relatively muted. For example, as we noted above, the 10-year Treasury yield actually dropped a bit for the month.

It is still too early to say whether and to what extent the past two months’ inflation reports are harbingers of a sustained period of meaningfully higher inflation, or whether, as the Fed and the consensus believe, most of the recent sharp price increases will prove transitory as current supply shortages catch up to demand with increasing capacity coming online as the pandemic recedes. Our current base case is that inflation does not get out of control. But we update our views as new information and data come out. In all cases, our portfolios remain well-diversified across a range of macro scenarios.

COVID-19 trends continue to improve across most of the globe, as reflected in the charts here in this article.

As vaccinations spread and COVID-19 recedes, we continue to expect a strong global economic recovery. This should bode well for riskier assets over the near term (next 12 months) at least. While the Fed is likely to soon signal it is moving closer to beginning to taper its QE asset purchases, monetary policy and interest rates should still remain highly accommodative for a while. Fiscal policy in the United States is less certain; there is a good chance the fiscal boost from the pandemic support programs will turn to a fiscal drag in 2022 (as they expire this year).

chart showing number of people who have received at least one dose of the covid vaccine
chart showing daily confirmed covid cases
chart showing daily covid deaths

But with the likelihood of recession very low—absent a severe, unexpected external shock—we see low risk of a bear market. Of course, 10%-plus short-term market “corrections” can always occur. Despite elevated valuations and unsustainably high year-over-year earnings growth in the United States (see the Ned Davis Research chart on the previous page), we think the path of least resistance for equities in general is higher. More specifically, we continue to see better shorter- to medium-term return prospects outside of the United States where earnings expectations are still modest and valuations more reasonable.

—OJM Group Investment Team

chart showing stock gains vs eps growth

Be sure to read the other articles featured in our June 2021 newsletter: