May was another strong month for risk assets, with the S&P 500 advancing 6.3%, while the NASDAQ surged 9.5%. The Dow gained 3.9% while the Russell 2000 small cap index rose 5.2% on the month. The rest of the developed world (CWI) gained 4.3% while Europe (IEV) advanced close to 6%. Bonds retreated close to 1% for the month.
TWG growth, moderate and conservative portfolios gained 4.8%, 4.1% and 3.4% respectively.
For the month, growth outperformed value, large outperformed small, and U.S. outperformed most of the rest of the world.
WHAT MOVED MARKETS
After a surge and almost full recovery from before liberation/tariff day on April 2, the market continued to advance in early May, spurred by a meeting between the U.S. and China on May 10th. The parties agreed to suspend the 100% + tariffs on the other country for 90 days. Half of the month’s gains occurred from this event as sentiment is driving the market much more than fundamentals.
The Fed held interest rates steady during their May meeting and continued to voice their “wait and see” posture, balancing the potential for higher inflation due to tariffs and potential pressure on the labor market. The Bank of England and European Central Bank both reduced interest rates, supporting financial markets in the Eurozone.
Inflation slipped 2.3% year over year in April, its lowest level since February 2021 and nearing the Fed’s 2% target.
April jobs report indicated a healthy pace of labor market activity, with employers adding 177,000 jobs, and the unemployment rate holding steady at 4.2%. However, cracks in the labor force are starting to show, with fewer job openings and a slight increase in job cuts.
Moody’s downgraded the U.S. credit rating one notch, but the market was able to look beyond this, showing a continued sense of investor complacency and economic resilience. A poorly subscribed U.S. treasury auction impacted the bond market, as yields increased.
Investor confidence was further bolstered by better-than-expected 1Q earnings and robust profit margins. The market is pacing for earnings growth of 13%, led by the magnificent seven tech stocks. The cohort grew earnings by 27% compared to the same quarter a year ago, well above the 9.4% earnings growth from the other 493 members of the index.
The outsized earnings growth of mega cap tech helped the NASDAQ 100 (QQQ) handily outperform the broad market. With tech earnings growing faster than the rest of the market, investors are once again flocking to mega cap tech where there is notable excess earnings growth.
PORTFOLIO ADJUSTMENTS
We started the month with a well-diversified portfolio across a blend of equity and fixed income ETF’s, with notable allocation in broad market funds such as SPLG and QQQ, complemented by strategic style ETF’s like RPV, VTV and RPG. International exposure was primarily through IEV. The portfolios concentrated large cap exposure suggested a growth-oriented tilt balanced by stable dividend and value factors. The initial allocation strategy established a solid foundation by diversifying across domestic, international and fixed income sectors, ensuring balanced return expectations with controlled risk. This diversification reduced idiosyncratic risk and positioned the portfolio to capture upside across multiple market segments.
By the end of the month, significant shifts were evident in both holdings and allocation weights. The portfolio increased its exposure to high growth ETF’s dramatically, with QQQ making up close to 40% of the equity sleeve, nearly quadrupling from the beginning of the month. Meanwhile, exposure to the value oriented and dividend ETF’s dropped substantially, indicating a tactical pivot toward more growth focused assets. New additions to mid-cap style ETF’s IWS and IWP suggested a strategic broadening to capture additional market niches and spread risk. Despite these shifts, volatility remained low. The strategic rationale behind these adjustments was to capitalize on growth opportunities in the tech-heavy QQQ while maintaining a measured presence in mid-caps to cushion potential volatility. Benefits from enhanced return potential with QQQ’s higher beta and strong historical performance while risk is moderated through selective fixed income and international holdings. These shifts highlight our agility in dynamic market positioning – leveraging growth trends without abandoning diversification and risk control.
In summary, the portfolio evolved from a balanced, diversified base into a more assertive, growth-focused allocation that still incorporates tactical elements of risk management. These adjustments improved expected returns through targeted growth exposure while managing downside risk via continued fixed income and broad market cushions, leading to balancing growth aspirations with prudent risk oversight.
