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May Monthly Update

By Thomas O. Herrick
Chief Investment Officer, Managing Director

Domestic equities largely consolidated and continued to trade within a relatively tight range throughout the month of April. Using the S&P 500 Index as context, the current equity trading range is roughly 3800 on the low end and approximately 4150 on the high end. A near-term challenge for US markets is the lack of breadth. Quite a bit of recent S&P 500 strength can be attributed to mega-cap growth stocks. Year to date, exposure to the growth side of the market has been crucial to performance. This was a key element within our 2023 Market Outlook as this is the portion of the market exposed to long-duration equities, which react positively to a Federal Reserve that is likely to pause its Fed funds rate rise campaign soon. To be clear, this is not the Fed easing as we saw in the beginning of 2020 and running through Q1 2022, but rather, a pause or potential end to the rate rise cycle. There’s more on that inflation-induced dynamic below. So far this year, using the Russell large-cap growth and value indexes as proxies, growth is up 14.61% versus value, up 1.53%. This is the complete opposite picture from last year. Those mega-cap names, such as Microsoft, Apple, Amazon, Alphabet (Google), and Meta, are reflected in the large-cap growth numbers. All said, our viewpoint is that this dynamic of mega-cap leadership looks a little tired near term. We recommend keeping a balanced allocation between growth and value.

Yields have extended their downtrend shift, with the benchmark 10-year Treasury currently trading at 3.46%. As a reminder, yields and bond prices move opposite. Lower long-term yields have produced solid bond market returns, especially in the longer-duration Treasury trade that we continue to recommend. Along with decent equity performance, this has produced good returns for the ubiquitous 60/40 stock/bond allocation, The Princess Bride just-mostly-dead recommendation in our 2023 Market Outlook. Stocks and bonds are much more highly correlated in a higher inflation dynamic, a more rate-driven market. This was a massive headwind in 2022 and is a tailwind in 2023.

“Along with decent equity performance, this has produced good returns for the ubiquitous 60/40 stock/bond allocation, The Princess Bride just-mostly-dead recommendation in our 2023 Market Outlook.”

While counter-intuitive to most, the time to extend duration in bonds is when the yield curve is inverted, as it has been for approximately one year. Once the curve inverts, with higher rates at the short end, markets will typically experience a lowering of rates across the curve over the next year or two as those high short-term rates bite into economic growth and inflation. Locking in longer-duration seals in higher yield becomes more valuable as rates decline. The consequent price appreciation in bond prices is most pronounced at the longer end. We see markets as mid-way through this trade and would continue to emphasize Treasuries over corporate credit, which may struggle if the economy slows more than expected. Treasuries also tend to benefit if markets adopt a risk-off attitude as they did during the bank crisis in March.

Graph with the headline, "Money growth leads inflation" showing year-over-year M2 and CPI spiking 2021-2022 and lowering in 2023Source: Federal Reserve, BLS

The most important economic data for markets remains inflation prints, most notably expressed in the monthly CPI report. Inflation has continued to trend lower in April, and we are of the viewpoint that the odds of lower-than-expected inflation are increasing. The leading edge of lower inflation, as it was of higher inflation, is money supply growth. This is not a new data point for us — we referenced money supply as a key driver of inflation in published material all the way back in the spring of 2021. After letting excessive liquidity run far too long into the first quarter of 2022, the Fed induced multi-decade high inflation numbers that peaked in the early fall. Since March of last year, money supply growth has been tamer. It recently has been negative for the first time since data collection started in 1959. Along with negative money supply growth, we have much tighter credit conditions in the banking system, as evidenced by Federal Reserve loan officer surveys. This was the case even before the March bank crisis but certainly has accelerated since those events. Rent and shelter costs have also plummeted since last fall, and we expect that data will begin to show up in monthly CPI soon. Shelter comprises approximately 40% of CPI.

Negative money supply growth, tighter loan standards, and a falling shelter component are all deflationary and support an outlook of lower inflation. Wage growth, although a little lower recently, is on the other side of the inflation ledger. All add up to a continuation of lower inflation prints. Consequently, the FOMC is likely to pause its rate rise campaign. However, we do not see them pivoting to cutting rates anytime soon, given that an improved inflation dynamic is still far from the 2% target.


Disclosures: Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers.

Any opinions expressed here are those of the authors, and such statements or opinions may not represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. This information may contain future predictions that are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.

These materials are furnished for informational purposes only, to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. Materials have been compiled from sources believed to be reliable; however, Cary Street Partners does not guarantee the accuracy or completeness of the information presented. Such information is not intended to be complete or to constitute all the information necessary to evaluate adequately the consequences of investing in any securities, financial instruments, or strategies described herein.

Cary Street Partners and its affiliates are broker-dealers and registered investment advisers and do not provide tax or legal advice; no one should act upon any tax or legal information that may be contained herein without consulting a tax professional or an attorney.

We undertake no duty or obligation to publicly update or revise the information contained in these materials. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.

These materials are for illustrative purposes only. Nothing contained herein should be considered a solicitation to purchase or sell any specific securities or investment related services. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of the portfolio’s holdings. It should not be assumed that any of the securities transactions or holdings discussed were, or will prove to be, profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein. A complete list of every holding’s contribution to performance during the period and the methodology of the contribution to return is available by contacting Cary Street Partners Marketing.

CSP2023093 ©2023 CARY STREET PARTNERS LLC, All Rights Reserved.

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