May was another volatile month for stocks, but thanks to a strong rally in the last week of the month, overall returns were left little changed from the end of April. Early in the month, the US Federal Reserve (Fed) set the tone by raising its short-term target rate by 0.5%, but Fed Chair Jerome Powell’s language was less aggressive (as in there may not be further upside rate surprises). This calmed the bond market and stalled yields from rising any further through the month, bucking the trend from the first four months of 2022. Bond returns as a result were also nearly unchanged compared to April. 

Below are total returns in Canadian dollar terms for May, and year-to-date respectively:

Commentary for May:

With no end in sight of the Russian invasion of Ukraine, the European Union (EU) continues to wean itself off Russian energy, which finally culminated in cutting over two-thirds of its crude imports from Russia toward the end of the month. The anticipation of the bans, combined with the easing of lockdowns in China, sent the price of WTI up for the month, rising to $115 by the end of May. On the same day the EU ban was announced, news of Russia being cut from OPEC production deals also surfaced, which tempered the rally from news of the EU ban. 

Despite the volatile month for stocks, Canadian, US, and international equities recovered most of their losses seen during mid-month. The market lows on May 19 were driven in part by poor earnings forecasts from companies like Walmart and Target, which were struggling with passing along increased costs. The last week, however, saw China starting to lift restrictions in Shanghai and Beijing, which should help to support global growth and pushed equities back up.

Within global equities, energy was the strongest performer thanks to rising oil prices. The Compass Portfolios and ATBIS Pools continue to underweight the sector most notably in the US and overseas markets. This underweight was the largest contributor to relative equity underperformance for the month. Equity performance as a result was about half a per cent behind the large cap benchmarks overall, with the Canadian holdings outperforming, and US and overseas (due to less energy exposure) slightly underperforming.

Although prices at the pump hit new highs and will likely contribute to inflation in May (when the print comes out mid-June), both the US Personal Consumption Expenditure (PCE) — the Fed’s preferred measure — and the CPI ticked downwards for April. Part of the reason for the decline, which we spoke about in last month’s commentary, is that inflation first started to take off between April and June 2021. Those high month-over-month inflation prints started to roll off for the April number. As May 2021 rolls off, it should help to offset the impact from energy this past month, so overall year-over-year inflation may not show an increase when compared to April.   

The Fed raised interest rates 0.5% on May 4 as planned, but with inflation potentially levelling off, Chair Jerome Powell did not indicate a need for further unanticipated increases. Bond yields were virtually unchanged from last month, as markets seemed to agree with the Fed’s schedule. With bond yields finally stabilizing after a dramatic year-to-date rise, the traditional relationship between stocks and bonds is finally showing signs of returning. On days that equity markets saw significant declines this month, bond prices were often up, once again acting as a diversifier for equities in the portfolios. Fixed-income performance within the ATBIM funds underperformed by about 0.6%, down slightly from credit spread increases on a few corporate issues. Overall yield within the funds’ bond and mortgage holdings remains close to 4.5%, roughly the same as last month.