May’s final session was a fitting one for a wild month, with the major indexes swinging up and down Tuesday before closing in the red.
Over the Memorial Day weekend, Federal Reserve Governor Christopher Waller said during a speech in Germany that he expects 50-basis-point interest-rate increases to continue into the later part of the year – a departure from previous dovish statements from Fed members suggesting hikes of that magnitude would be limited to the next two summer meetings.
That sent bond yields spiking Tuesday, with the 10-year Treasury yield reaching as high as 2.88%.
“It is really too bad that the Fed can’t learn to speak with one voice on this,” says Dean Smith, portfolio manager and chief strategist of investment technology platform FolioBeyond. “The constant seesaw from hawkish to dovish is increasing uncertainty in the market and in the economy. The ‘buy-the-dip’ mentality that has been nurtured in a generation of investors is being supported and encouraged by these carelessly dovish Fed speakers. In the end, all it does is make their job harder.”
Also Tuesday, the Federal Reserve’s preferred gauge of inflation – the core personal consumption expenditures (PCE) price index – rose by 4.9% year-over-year and 0.34% month-over-month, which was more than expected.
“The April increase represents the third month of more muted, but still solid, increases,” UBS analysts note.
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The consumer discretionary (+0.5%) and communication services (-0.1%) sectors were the best performers in a largely down day. That was largely thanks to Amazon.com (AMZN, +4.4%), whose shareholders on Friday approved a 20-for-1 AMZN stock split set to take effect June 6; that lifted spirits at Alphabet (GOOGL, +1.3%), which intends on executing its own 20-for-1 GOOGL/GOOG stock split in July. (Indeed, 2022 is shaping up to be quite a busy year for stock splits.)
That helped the Nasdaq Composite deliver the smallest loss among the major indexes Tuesday: a 0.4% decline to 12,081. However, the tech-heavy index posted a 2.1% decline for the entire month. The S&P 500 (-0.6% to 4,132) finished May marginally higher, however, as did the Dow Jones Industrial Average (-0.7% to 32,990).
Other news in the stock market today:
- The small-cap Russell 2000 slid 1.3% to 1,864.
- Gold futures declined 0.5% to $1,848.40 ounce, clinching the yellow metal’s second consecutive monthly decline.
- U.S. crude oil futures was down 0.4% to $114.67 per barrel, good for a nearly 10% gain in the commodity across May. Oil had a back-and-forth session; gains from the European Union’s agreement to ban most Russian crude oil imports were negated after a report that OPEC+ was considering suspending Russia from its oil-output deal.
- Bitcoin rebounded hard during the long weekend, improving by roughly 10% to $31,649 from its Friday afternoon prices. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
As Red Flags Mount, Stock Up on Quality
A few cracks are starting to show in the American economic engine. Wealth management firm Glenmede’s Jason Pride and Michael Reynolds say that several U.S. leading indicators are signaling slowing growth.
“Last week, the Flash Composite PMI, which tracks the manufacturing and services sectors, fell,” they say. “The latest round of retail earnings reflects slowing demand as consumers grapple with higher costs and pivot their spending from goods to services. The housing market is starting to show signs of softening as sales of newly built homes fell 16.6% in April from March (rising mortgage rates are reducing buyer demand).”
This has Glenmede’s recession model projecting a 10% probability of recession within the next 12 months, up from 0% projections to start the year.
That’s the kind of environment that, unlike the year-plus of rip-roaring gains out of the COVID bottom, necessitates selectivity – every stock pick isn’t just going to stick to the wall, so to speak. Defensively minded investors, for instance, will want to focus on stocks that seem best positioned to perform in bear markets. Dip-buyers will need to make a distinction between “cheap” and “undervalued” – the latter you’re likely to find in these high-growth-potential stocks boasting low prices.
And on the whole, it pays to invest in the best of the best. These 10 S&P 500 stocks, for instance, represent the best the index has to offer right now, in the eyes of Wall Street’s analyst community. Each of them is teeming with bullish pros who believe they have anywhere between 20% to 110% upside over the next year.