The benchmark index traded in a tight range throughout the month, as a surge in technology stocks was countered by losses in energy names. It was a busy May, with market participants digesting a Federal Reserve rate hike, the first quarter earnings season, a regional banking crisis, a host of economic data and the debt ceiling saga.
The Fed in the first week of May hiked interest rates by a widely expected 25 basis points. Moreover, central bank chair Jerome Powell stressed that policymakers would continue to take a data-dependent approach for future rate decisions. Markets at that time seemed to believe that the Fed was done with hikes. Those expectations were recalibrated as the month progressed after more data came in which showed that inflation remained elevated and the labor market continued to be highly resilient.
The Fed’s monetary policy actions took somewhat of a backseat in the first half of the month as headlines were dominated by worsening deposit situations at several U.S. regional lenders. First Republic Bank was rescued through a government-engineered deal that saw it being taken over by JPMorgan (JPM). Western Alliance (WAL), PacWest Bancorp (PACW) and First Horizon (FHN) were the other banks that flagged issues.
The instability in the financial sector also weighed on the Fed, with the minutes of its May meeting released last week showing that policymakers were divided on whether they should continue raising interest rates amid the stress on regional banks.
The second half of the month saw the debt ceiling drama overshadow the Fed’s monetary policy actions. Though it was highly unlikely, market participants fretted over the possibility of a technical default earlier in May when Republicans and Democrats were unable to come to an agreement over the nitty-gritties of the debt ceiling deal. However, major progress over the weekend saw the proposed 99-page bill pass out of the House Rules Committee and head for a full vote, allowing investors to turn their attention back to the central bank.
Markets caught a bit of a break on Wednesday. Most Fed speakers through the month made no indication whatsoever that a pause in rate hikes or even rate cuts will come this year. Today, however, Philly Fed President Patrick Harker at a fireside chat said that the central bank should skip a hike at the June meeting as monetary policy was close to being restrictive. Fed Governor Philip Jefferson also signaled that skipping a hike would allow the central bank to assess data.
The comments have led to the markets now pricing in a nearly 74% chance of no hike in June, according to data from the CME FedWatch tool.
The S&P 500’s (SP500) slight gain for May was largely powered by a more than 9% jump in the Technology sector. The initial spark was lit by Big Tech earnings, with iPhone-maker Apple (AAPL), Google-parent Alphabet (GOOG) (GOOGL), Facebook-owner Meta (META) and Microsoft (MSFT) posting strong results.
The increasing hype and enthusiasm over artificial intelligence also led investors to pour in their money into chip stocks, chief among them being NVIDIA (NVDA). The company became the first chipmaker to hit $1T in market capitalization, and its shares have jumped more than 35% YTD.
Turning to the monthly performance of the other S&P 500 (SP500) sectors, Communication Services and Consumer Discretionary were the other two gainers aside from Technology. Energy slid more than 10% and topped the losers amid a slump in crude oil prices. See below a breakdown of the performance of the sectors as well as their accompanying SPDR Select Sector ETFs from April 28 close to May 31 close:
#1: Information Technology +9.29%, and the Technology Select Sector SPDR ETF (XLK) +8.92%.
#2: Communication Services +6.21%, and the Communication Services Select Sector SPDR Fund (XLC) +3.91%.
#3: Consumer Discretionary +3.09%, and the Consumer Discretionary Select Sector SPDR ETF (XLY) +2.54%.
#4: Industrials -3.45%, and the Industrial Select Sector SPDR ETF (XLI) -3.15%.
#5: Health Care -4.44%, and the Health Care Select Sector SPDR ETF (XLV) -4.27%.
#6: Financials -4.48%, and the Financial Select Sector SPDR ETF (XLF) -4.25%.
#7: Real Estate -4.66%, and the Real Estate Select Sector SPDR ETF (XLRE) -4.53%.
#8: Consumer Staples -6.21%, and the Consumer Staples Select Sector SPDR ETF (XLP) -6.16%.
#9: Utilities -6.36%, and the Utilities Select Sector SPDR ETF (XLU) -5.87%.
#10: Materials -7.11%, and the Materials Select Sector SPDR ETF (XLB) -6.87%.
#11: Energy -10.61%, and the Energy Select Sector SPDR ETF (XLE) -10.03%.