Overall, economic and market updates in May were largely positive. The debt ceiling standoff highlighted the outsized impact that political developments could have on markets. Still, the agreement to suspend the debt ceiling helped ensure that the worst is likely behind us.
The economy continued to show signs of solid growth during the month, supported by a strong labor market, improving consumer confidence, and continued consumer spending growth. While stubbornly high inflation is a concern, it's important to note that sticky inflation is at least partially a consequence of strong economic expansion. While there's still work to be done, healthy economic fundamentals are an encouraging sign that we're not rapidly approaching a recession despite attempts from the Fed to slow the economy through higher rates.
BREAKING IT DOWN
The Debt Ceiling Impact
The debt ceiling standoff dominated headlines throughout May due to a potential U.S. government default in early June, worrying investors across the globe and serving as the major factor behind market turbulence. Fortunately, a month-end deal that suspends the debt ceiling until January 2025 was reached, solving the issue for now and avoiding an unprecedented government default. While the delay means this issue will likely reemerge in 2025, the market risks from this standoff should largely be behind us.
The Federal Reserve (The Fed)
At the beginning of May, the Federal Open Market Committee announced an interest rate of 25 basis points, which aligned with investor and economist expectations and brought the upper limit for the federal funds rate to 5.25 percent. While the Fed has signaled that it's likely close to the end of its current rate hiking cycle, the higher-thanexpected inflation levels could support further rate hikes this year. All eyes will be on the June meeting to see if hotter-than-anticipated inflation reports released in May will be enough to support an additional rate hike of 25 basis points (bps).
Equities experienced a mixed month in May as technology-related stocks rallied due to increased investor enthusiasm surrounding AI at month-end, while most other sectors remained flat or fell. These mixed results were supported by improving fundamental performance and technical factors. All three major U.S. indices finished May above their respective 200-day moving averages (a widely monitored technical signal as prolonged breaks above or below this level can signal a shift in investor sentiment). Internationally, May was a challenging month as both developed nations and emerging markets fell.
Economic updates released in May pointed toward continued growth. The April job report indicated that hiring accelerated for the month, revealing the labor market's resiliency. Additionally, there was an increase in job openings toward month-end, signaling continued high levels of demand for workers. Both major consumer sentiment surveys improved more than expected in May, an encouraging sign given the negative debt ceiling headlines throughout the month and highlighted consumer resilience. However, not all of May's economic updates were positive. While headline consumer and producer inflation continued to slow on a year-over-year basis in April, core inflation remained stubbornly high.
While the immediate market threat from the debt ceiling standoff is likely behind us, the episode increased uncertainty and weighed heavily on markets and was a reminder that markets face a landscape of swiftly shifting risks. Looking forward, the Fed will continue to serve as a potential market risk, as we saw in May when rising expectations for a possible rate hike served as a headwind for markets. Additionally, economists and investors will keep a close eye on the central bank in the months ahead due to the potentially disruptive effect that any changes to monetary policy can have on markets.
Abroad, China remains a source of uncertainty, given the country's importance for global trade and economic expansion. And while the Russian invasion of Ukraine continues, this situation can have other negative impacts.
The most likely path forward is continued economic growth in the intermediate to long run. The positive economic backdrop and decline in political risk should support markets in the months ahead.
Economists like to remind us there is no such thing as a free lunch, meaning all investments carry risk. A well-diversified portfolio that matches investor timelines and goals remains the best path forward for most.
Please do not hesitate to contact our office if you have questions or want to check-in. We are happy to walk you through our approach and explain what we are doing to keep you on track to meet your financial goals and needs. We look forward to hearing from you and hope you have a wonderful week.
Charles D. Dodds, Jr., CFP®, CLU®, ChFC®, CIMA®
President, Sr. Portfolio Manager
Adrian F. Dodds, CFP®
Managing Partner, Sr. Financial Advisor