In Short

• Despite some late-month choppiness, the S&P 500 Index had its best May return since 2009 with other major equity indices hitting fresh all-time highs
• April’s core PCE data and downwardly revised U.S. Q1 GDP provided further evidence that the tug-of-war between inflation and growth could be more prolonged than originally anticipated
• U.S. consumers’ attitude toward the economy improved, with consumer confidence exceeding expectations and increasing for the first time since January
• In recent months, global inflation data have begun to diverge, which may present different opportunity sets for international exposure
• We encourage clients to focus on rebalancing to their strategic asset allocation targets, with particular emphasis on diversification and the redeployment of cash and short-duration fixed income

U.S. Economic Data Proves More Confounding Than Confirmatory

As summer takes hold, investors who follow the “sell in May and go away” stock market adage—which suggests moving out of stocks before summer, when trading volumes are lower, and reinvesting in the fall—may have been surprised thus far. The S&P 500 Index had its best May return since 2009, extending well beyond long-term averages at +5.0% versus the 10-year average of +0.7%. Major equity indices hit fresh all-time highs, with the Dow Jones Industrial Index surpassing 40,000 and the Nasdaq Composite outpacing its U.S. equity counterparts due to the resurgence of a narrow group of mega-caps. Nvidia was a main driver as its stock surpassed $1,000 per share after the company announced a 10-for-1 stock split and previewed its next-generation data center chips following a blowout earnings report. Earlier fears of rising inflation were tempered by a softer April inflation report, leading to a further rebound in equities alongside signs of weakening in the labor market and better-than-expected quarterly earnings for the S&P 500 Index.

However, some choppiness emerged toward the end of the month, following the release of April’s core PCE data (the Federal Reserve’s (Fed) preferred inflation gauge) and a downwardly revised U.S. Q1 GDP reading. In our view, this data was a mixed bag, providing further evidence that the tug of war between inflation and growth could be more prolonged than anticipated at the start of the year. Even with some volatility during the last week of the month and the S&P 500 Index giving back 0.5% of gains as a result, the major equity indices posted strong returns.

Bonds performed well, too. The Bloomberg U.S. Aggregate Bond Index had its best May since 2019 at +1.7% and posted its best monthly year-to-date return after experiencing a pullback in yields, as the U.S. 10-year Treasury yield fell from 4.71% at the end of April to a low of 4.34% in May before climbing back up to a peak of 4.61% toward the end of the month. The initial drop in yields came in part from the Fed’s move to ease the pace of its balance sheet reduction, which was then offset by a few weaker Treasury auctions. Simply put, an excess of supply with decreased demand pushed yields upward.

Commodities continued to rise in May, posting solid year-to-date performance with even more upside excluding energy, and showing overall breadth within the asset class. The Bloomberg Commodity Index posted a return of +1.8% for the month and has kept pace with equities so far this year as the second-best performing asset class (+6.8%, and +8.1% ex-energy). Our Asset Allocation Committee currently has an overweight assigned to this asset class, which, in our view, offers a potential hedge against inflation, global growth surprises and geopolitical shocks.

U.S. consumers’ attitude towards the economy improved in May with consumer confidence exceeding expectations, increasing for the first time since January. There has also been a shift in investor behavior when looking at asset flows so far this year. According to the Investment Company Institute, equity and fixed income mutual funds and ETFs saw net outflows in both 2022 and 2023, with investors favoring more risk-averse assets, including cash. So far in 2024, these investment vehicles have seen net inflows, suggesting that investors are feeling more bullish on the economy. Another metric that we have mentioned in the past, the bull-bear spread, rose to a net bullishness level of +12.3 at the end of May versus -1.8 in April. Overall, it appears that investors feel that the economy remains resilient, as labor markets are showing signs of easing and central banks globally look ready to provide support.

Going Global, Potential Divergence

Central banks across the globe have been acutely focused on fighting inflation, which became one of the main concerns for the global economy following the pandemic. After some hesitation, record price increases in Europe and the U.S. were answered with steep interest rate hikes. Historically, many developed nations have looked to the Fed for guidance on monetary policy. In recent months, global inflation data have begun to diverge, which may cause some major developed nations to begin cutting interest rates ahead of the U.S.

For example, due to a weakening growth outlook, ongoing inflation normalization, and formal guidance to reduce the level of monetary restriction, we believe the European Central Bank is close to the start of a rate-cutting cycle that could begin as early as June. Similarly, the Bank of England has shown increasing confidence that the risks of persistent inflation are abating; we believe that rate cuts could begin there in June as well. This contrasts with the U.S., where we expect two rate cuts this year, but not until September and December.

Global Manufacturing PMI metrics appear to be broadly improving, reaching a level of 50.9 in May (above 50 indicates expansion), up from 49.0 at the end of 2023. Emerging markets are a standout, with India leading the way at 57.5. Emerging markets are expected to outpace the rest of the world in GDP growth in both 2024 and 2025, according to the International Monetary Fund.

The eurozone economy is growing nicely after a long period of underperformance relative to the U.S., but not all countries are equally well off. The region’s industrial core (namely Germany) has been lagging less-wealthy countries. German real GDP is only 0.3% larger than before the pandemic while Portugal, Italy and Spain have grown 6.1%, 4.6% and 3.7%, respectively (Bloomberg). Inflation has generally eased faster in southern Europe, supported by consumer spending. In short, the eurozone has begun to show some green shoots of recovery, and trimming borrowing costs could offer a needed boost to growth.

Japan is an outlier when it comes to central bank policy. In March, the Bank of Japan raised interest rates for the first time in 17 years, reflecting a shift in policy. There has been a clear pickup in manufacturing activity, with PMI rising to 50.4 in May, the first expansion reading in a year. Japan is seen as a geopolitically neutral market, which has strong relationships with the U.S. and Europe, making it a compelling international investment destination amid U.S.-China tensions.

We believe other reasons to keep an eye on Japan include a pickup in wage growth, a stabilization in consumer prices (indicating improving economic fundamentals) and Japanese companies announcing bold moves to improve capital efficiency, supported by the government's commitment to corporate reform. However, potential risks to Japan's economic momentum include its struggle with deflation, low economic growth, the challenge of sustaining reform efforts, and the importance of domestic and global investor participation in the market.

There are also risks to the global outlook. Continued geopolitical tensions and persistent core inflation where labor markets are tight are probably the most pressing issues, but the divergence in disinflation rates globally could persist, affecting currency markets and forcing consumers to struggle under the weight of continued costly debt. On the topic of currencies, recall that a weaker U.S. dollar relative to peers usually comes alongside outperformance from regions outside of the U.S. Since 2021, the U.S. dollar is up 14%, which correlates with the strong performance seen in U.S. equities during the same period.

On the flip side, inflation could fall faster than expected, artificial intelligence tailwinds that markets have already begun to experience could boost productivity, and looser fiscal policy could prop up economic activity. These are all dynamics to consider as we near the midpoint of the year.

With markets hitting all-time highs across the world, investors may wonder where we are in the market cycle and whether it is time to reduce risk. Given the relative lack of volatility in 2024 up to this point, we encourage clients to focus on rebalancing to their strategic asset allocation targets, with particular emphasis on the redeployment of cash and short-duration fixed income should equities and longer-duration bonds come under pressure. We emphasize the importance of diversification, both across asset classes and active-versus-passive vehicles, to potentially provide better risk-adjusted returns and downside protection. We favor active fund managers with demonstrated investment processes, which seek to invest in quality companies. This approach emphasizes stability and resilience, aiming to insulate assets from unpredictable swings in the market while positioning for sustainable long-term growth.

Portfolio Implications

Equities were positive for the month, led by large-cap growth stocks, which benefitted from AI secular growth tailwinds, though domestic small caps broadly outperformed large caps. We maintain an overall neutral view across equities, with an overweight to small caps, a sector that had priced in a hard-landing scenario. Within equities, we still favor lower-beta, higher-quality names, with a neutral view on value versus growth. In this more challenging environment, we also favor employing active management to select companies with high earnings visibility.

Fixed Income prices moved generally higher, with longer-dated corporate bonds outperforming as yields ultimately declined. We continue to favor credit markets, maintaining an overweight view on investment grade securities. With short-term rates likely to decline later this year, we believe that clients may want to consider moving away from overweight cash positions and locking in incrementally longer-term bond yields. We maintain a neutral view on high yield debt, given the recent tightening of spreads (yield advantage over Treasuries), which has reduced the risk-adjusted return potential of the asset class.

In a challenged fundraising, exit and financing environment, there are significant opportunities within Private Markets for firms and strategies that can act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. This backdrop, along with Neuberger Berman’s deep relationships and unique position within the private equity ecosystem, has translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit and capital solutions.

Index Returns as of May 2024

Source: Bloomberg, total returns as of May 31, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg ExEnergy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.