Continuing Inflation and What to Expect Moving Forward
May saw a positive return in the S&P 500 after having a particularly rough April with many sell-offs due to rising interest rates. This performance was only positive right around 0.2%, but it was consistent and in line with the Russell 2000 Index. Although this performance was encouraging after April’s negative return of over -8%, it should be noted that the index was still volatile, down more than 5% at its lowest in May.
The sector with the highest returns in May was Energy, returning about 16%, as the price of WTI Oil rose 9.5%. On the flip side, the worst-performing sector was Consumer Discretionary, which produced a return of -5.1%, as industry leaders like Amazon and Tesla ended the month trading lower. Consumer Staples did not do much better as a sector, returning -4.1%, primarily because of weaker than expected earnings reports.
Retailers like Walmart and Target had lower-than-expected earnings. It is likely that they were slow to react to inflation and did not raise prices fast enough to combat the costs they experienced throughout their supply chains. The increase of the expenses by their vendors and softening consumer demand was reflected in a growth in their inventories, especially for discretionary purchases like home goods and apparel.
Both companies have stated that they expect to increase prices soon to combat this inflation. Across the board, this level of inflation catches companies off guard. Companies are beginning to forecast lower earnings and take on more inventory as their costs increase and consumer demand for products decreases. This is the natural course of inflation and could take a few more quarters until we really see significant relief in this regard. Companies will likely continue to allow prices to go up as their focus remains on keeping profit margins stable.
US Sector Percentage Returns for May 2022
As for bonds, corporate investment-grade bonds ended the month on a high note, generating roughly a 1.9% return, a bit higher than corporate high-yield bonds, which only returned 1.6%. The Federal Reserve continued to raise rates at +0.5% in May, and we should expect this action in June and July. This should remain at the top of investors' minds. Inflation did not slow down, and the Federal Reserve will likely continue raising rates until it definitively sees that inflationary pressures are easing. In the near term, the outlook for the exact track the market will follow is uncertain because of all these factors that leave the market searching for direction.
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