Outlook | AIM

Market Update for May 2023

Written by Brian Huckstep, CFA, CFP®, Chief Investment Officer

Asset Class Recap for the Month

May was punctuated by higher Tech Stock prices, lower Energy Stock prices, and higher interest rates.

Growth and Value Stock prices headed in opposite directions in May, with Growth up 4.6% and Value down 3.9% - an unusually large spread in returns over a one month period. Growth Stocks have outperformed Value Stocks by 22.2% Year-To-Date, which has completely unwound Growth’s 21.6% relative underperformance during 2022.

Value Stock returns have been steadily lackluster for the last year and a half, while Growth Stock returns, which are much more economically sensitive, have been whipsawing up and down based on uncertain expectations. Drilling down to the sector level, Technology Stock prices increased sharply in May, returning 9.5% while Energy Stock prices lagged, returning –10.0%. Tech prices have run up on a bit of Artificial Intelligence (A.I.) fever.

Websites that provide answers to user questions using the information on the world wide web have been around since the mid 1990’s, but the new trend for sites to understand and provide answers in “natural language” has caught the imagination of many investors, leading to sizeable price jumps for many software and hardware firms.

In contrast, oil prices peaked on June 8 last year at a price of $122.11 per barrel, but have fallen by 44%, to $68.09 at May 31 this year. Clearly this sort of price drop makes it much harder for energy companies to generate the types of profits that led them to return 55% in 2021 and 66% in 2022, and prices for oil producing stocks have been reacting accordingly.

International Stocks trailed U.S. Stocks by 4.6% last month. A majority of the performance delta between U.S. and International Stocks was due to currency impacts, not the actual local stock prices.

Higher yields on U.S. Bonds make U.S. Bonds and Dollars more attractive, and prompt foreign investors to buy Dollars, making our currency appreciate relative to other currencies (which is bad for our foreign stock returns).

Investments that are sensitive to interest rates performed relatively poorly last month, including; longer dated Bonds, Real Estate, Financials, and Utilities. The U.S. Federal Reserve raised its Federal Funds target rate by 0.25% on 5/4/23. This move was widely anticipated, but was an unpleasant, necessary move to continue combating inflation. The inflation reading for April was surprisingly high, showing an increase of 0.37% over March. The CPI-U reading was 302.918 at 4/30/23 vs 301.808 at 3/31/23. For the Fed to achieve its 2% annual inflation, monthly average inflation should be around +0.17% each month, so April was still too high for the Fed’s taste – increasing the probability (however slight) of additional Fed rate hikes in the next few months.


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Written by Brian Huckstep, CFA, CFP®, Chief Investment Officer