May market update from Elevage Partners

Chief Investment Officer Thierry Hasse

May has proven to be nothing short of a roller coaster ride for the markets, as ongoing volatility and worries about monetary tightening to combat inflation sparked fears of a recession on the horizon.

The year-to-date sell-off of stocks accelerated this month, while the S&P 500 had its worst month since the onset of the pandemic. By mid-May, it had closed at a 14-month low; on Friday, May 20 the S&P 500 was down over 20% from its Jan. 4, 2022, peak , the classic definition of a bear market.

On May 4, policymakers had raised short-term interest rates by 0.5% to a target range between 0.75% and 1% in a bid to lower inflation — the highest rate hike in more than two decades. (Rate changes have traditionally been in quarter-percentage-point increments.) This rise in rates had significant impact across asset classes. Risk assets have sold off and bond returns have been negatively impacted by the dramatic rise in rates. Further, higher rates make it more expensive to borrow, which, in theory, should depress the consumption that is enabling companies to raise prices.

The Fed’s recent rate hikes should come as no surprise, though, as it tries to combat the highest inflation rate in 40 years, even as some economic data showed some easing of price pressures last month.

Retail earnings disappoint, housing slumps

In other financial news, retailers have been releasing massively disappointing earnings in mid-May , with their profit margins being negatively affected by rising input and fuel costs. This development held the attention of investors anxious to see how companies are managing inflation. Investors and analysts have pointed out that what has so far been a downward retail spiral reflects a shift in consumers’ demand for services rather than goods, and some have suggested stocks may be getting overly punished for their results.

In the housing market, government data shows sales of new, single-family homes fell by nearly 17% month-on-month to 591,000 units in April — well below the consensus forecast of 750,000 units.

Geopolitical instability and pandemic impacts linger

As we look abroad, there appears to be no end in sight for the geopolitical instability that has characterized 2022. It appears that the war in Ukraine may turn into an extended conflict that could cause an international food crisis, as commodity exports from this region continue to dwindle.

In Davos at the World Economic Forum this week, German Chancellor Olaf Scholz called for a broader international effort to isolate Russia and thwart President Vladimir Putin’s efforts to undermine the global order.

Concurrently, China’s stringent zero-COVID policy will likely continue to constrict economic output and credit conditions throughout this year. The lockdowns in Shanghai and regions near the country’s economic epicenter have snarled manufacturing activity, battery metals demand, cobalt market sentiment, and other commodities production. China’s slowdown is a large shock that will be felt for quite some time.

We believe volatility, inflation will continue

So where does this leave us? In many ways, with a similar outlook to how we began the second quarter, as volatility and inflation will likely not abate any time soon. Indeed, these factors remain present today and are taken into consideration as we position your portfolio for the current bear market (and the eventual bull market that will follow).

We further remain focused on reviewing the effects of ongoing geopolitical instability, the Fed’s next move, and market shifts as part of our regular process for evaluating risk and opportunities. We remind clients that overly emotional reactions to a down market are a good way to derail progress made toward reaching your financial goals. So, as a central tenet of our practice, we continue to emphasize staying the course, active portfolio monitoring, thoughtful diversification and opportunities to take advantage of low-cost buys in this bear market. Collectively, these endeavors will help maintain a resilient portfolio for what appears to be choppy markets with high volatility in the near term.

Perhaps the most important thing to remember is that bear markets always happen and, statistically, they come around about once every four years. Typically, they tend to be rather short, and these are periods when you see a lot of attractive bargains that you can take advantage of.

As a friendly reminder, the stock market will be closed on Monday for Memorial Day. And as we inch closer to summer, thank you for taking the time to read my market commentary. Please do not hesitate to contact me for personal insights tailored to your portfolio.

Best regards,
Thierry Hasse
Chief Investment Officer


Important Disclosures
*Past performance is not an indicator of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Elevage Partners, LLC (“Elevage”). Elevage is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which may be requested by calling (877) 922-8243 or visiting http://www.adviserinfo.sec.gov. The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. Elevage assumes no responsibility for errors, inaccuracies or omissions in this information. Elevage reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive. It should not be assumed that any of the securities transactions, holdings or sectors discussed were, or will prove to be profitable, or that the investment recommendations or decisions Elevage makes in the future will be profitable or will equal the investment performance of the securities discussed herein.ELV-17-02

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