Stocks were up again in May as the S&P 500 dabbles with highs not seen since May of 2015. Tech-heavy NASDAQ and developed international markets (as measured by the MSCI EAFE index) are still struggling to recover from the January correction. 1 As a result, equity investors haven’t seen the benefits of the recovery show up on statements as you may normally expect when stocks have been up three months in a row. Bond yields have been reacting to various economic news stories where the probability of a June rate hike by the Fed yo-yoed from no chance, to good chance, back to no chance in just a few weeks’ time. Bonds ended flat for the month. 2
The market is still trying to decide if our economy is really strong enough to support higher interest rates, or if we are still at risk of another recession. We have official unemployment coming in at 4.7% while the “underemployed/marginally attached” (U-6) rate is still at 9.7%3. Although this is the lowest unemployment has been since 2007, some still think the numbers don’t truly reflect the strength of the economy. We have looked at P/E Ratios and other financial measurements in the past. One newsworthy item has been profit margins. The S&P 500 has been showing margins shrinking over the past couple years. This can sometimes be an indicator of bad things to come, but what if you strip the oil-influenced, energy sector out of the profit margin analysis? As you can see in the chart below, profit margins of non-energy companies are actually increasing. This could indicate that we still have plenty of growth awaiting us in the otherwise stagnant market.
Locally, and throughout many parts of the country, housing has picked up dramatically. With new home construction still well below the pace we saw before the financial crisis, the back log of homes on the market has dissipated and we are seeing signs of a seller’s market. I have personally heard of more than a few people who have accepted offers on the homes within a week of putting them up for sale, sometimes above asking price. Couple this with very low mortgage rates, we have a very amicable setting for American consumers to keep spending, thereby aiding positive economic growth. To reiterate our position again, as anemic as our GDP growth appears to be, we don’t foresee a recession in the near future.
We have the summer months ahead of us, which traditionally have stock market moves that challenge the buy and hold mentality. However, we believe cooler heads will prevail and benefit from the stormy markets ahead. Enjoy the warm weather and do something fun this summer!
1 Thomson Financial
2 Bloomberg, JP Morgan
3 Bureau of Labor Statistics
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