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May sprinkles — Week of June 1, 2021

Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor

indexwtdytd1 year3 years5 yearsindex level
S&P 500 Index1.2012.6140.7117.7617.114,204.11
Dow Jones Industrial Average1.0313.7638.0314.3116.7434.529.45
Russell 2000 Small Cap2.4515.3059.7313.1816.052,268.97
NASDAQ Composite2.086.9847.2323.9724.0513,748.74
MSCI Europe, Australasia & Far East0.539.9840.158.3610.282,325.27
MSCI Emerging Markets1.905.4949.528.9013.911,354.31
Barclays U.S. Aggregate Bond Index0.22-2.41-0.305.193.232,334.29
Merrill Lynch Intermediate Municipal0.140.484.124.893.21318.63

As of market close May 28, 2021. Returns in percent.


May Sprinkles 

Most of our readers are ready to dry out from recent rains. Our local forecast does not offer much relief this week. Nor sadly is there much relief in sight for our California neighbors who are in a drought. May’s stock market performance represented a sprinkling of good and just okay results. May usually is one of the worst performing months, with most years posting flat numbers at best. All the major indices, save for Dow Utilities, were up for the month, led by the Dow Transports’ 2.5%. The S&P 500 notched its fourth consecutive monthly gain. China’s Hang Seng index rose 1.9%, helping emerging markets that otherwise were held back by India’s virus struggles. International developed markets were helped by France’s 5.5% reopening surge.  

We believe the Recovery Race has almost been won by vaccines. Recovery, and soon, expansion, are at hand for the economy. Sector rotation away from tech on and off over the last three months was the first clue. Confirmation came in first quarter earnings. Are we done with pro-cyclical expansion? Not by our charts. Last month technology as a group trailed all sectors, averaging losses in the 2% range. Value sectors that utilize raw materials, such as consumer staples and manufacturers, are gaining relative strength. Industrial and Materials stocks such as Caterpillar, Raytheon, Dow and DuPont are benefiting not only from reopening but also increasing capital spending plans by private firms and governments. 

The sideways price action in most stocks over the last several weeks has washed out overbought conditions and lowered the excitement level a bit. Improving earnings estimates have lowered valuation concerns. Today the S&P 500 sits between 21 and 22.5x forward earnings, depending on where you get your earnings estimates. The percentage of stocks above their 50- and 20-day moving averages is rising again, and volatility measures are at their lowest levels in six weeks. Combined, these indicators make for a more favorable environment for stocks than at the end of April. 

What's Next?

Stock returns in year 2 of a Bull Cycle are typically not as strong as year 1. The only divergence of consequence at the moment is in the technology sector, where the advance-decline line has turned lower. Big tech names giving back a few percentage points of their impressive gains does not concern us right now. Their weakness is more a function of recent inflation scares and rotation into value sectors, not any concerns about their business.  

Today is historically the best performance day for the month of June. The rest of the month, well, it’s not so great. According to our trusty Stock Trader’s Almanac, June ranks 11th out of 12 months for the Dow Industrials and 9th out of 12 for the S&P 500. Well, somebody must be near the bottom. If a correction does come our way this month, it would be time to pull out our buy lists. The Fed is committed to keeping monetary conditions accommodative and interest rates low. Congress is committed to spending freely and the global economy is still reopening. All bode well for future earnings. 


Inflation remains front and center, and we certainly have spilled our share of digital ink on the topic. Higher prices are going to be around for longer than the Fed would like. For a decade now the Fed has lobbied, hoped and wished for 2% inflation. Messed up supply chains and increasing demand will keep headline inflation close to 3% for the balance of this year. If inflation indices do not push up into the 5% level, stocks should be fine. Interest rate markets clearly are not bothered by five-year market expectations of 2.6% inflation, as rates have held steady or moved lower after the news. 

The recent commodity boom has garnered the most attention of inflationistas, and we think prices will move higher in the coming months. Front month futures for lumber, wheat and copper have moderated recently, likely because of China’s tightening rules on commodity lending. We doubt that stocks will embark on another 5% run in the coming weeks but see no reason to change allocations either. Patience is our best tool now. 

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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