Monthly Market Update — September 2021

Key Points

  • The Haves and Have Nots Most major asset classes declined in May, including most global equity indices. However, a select few U.S. large-cap technology-oriented stocks were able to keep the S&P 500 Index in positive territory (up +0.4% in May, for a third consecutive month), but also carried the Nasdaq Composite Index to a +5.9% gain in May. The Nasdaq has 457 technology companies, out of 3,589 total constituents, that make up about 53% of its total market capitalization.
  • Debt Deal Done A bipartisan bill was hammered out that suspends the debt ceiling through Jan. 1, 2025, cuts government spending, formally ends a Covid-era three-year freeze on student-loan payments, advances large-scale energy and infrastructure projects, raises the work age for food aid eligibility, and cancels almost $30 billion in pandemic relief funding.
  • Labor Market Remains Robust The U.S. labor market remains resilient, as employers added a seasonally adjusted 339,000 jobs to the economy in May. The prior two months’ payrolls were also revised higher by 93,000, and hourly earnings were also up. On the downside, hours worked shrunk and the unemployment rate unexpectedly rose to 3.7%, which is still historically low, but the highest level since October of last year.
  • Leading Indicators Flash Warning Sign Despite the resilient labor market, recessionary pressures persist as leading economic indicators are flashing warning signs. The Conference Board, a nonprofit economic think tank, publishes the Leading Economic Index (LEI) that tends to lead turning points in the business cycle. Historically, the year-over-year change in the LEI has shown a close relationship with the year-over-year changes in both the U.S. stock market and the broader economy. Recently the LEI has seen a sharp and long contraction, while the stock market has rallied, and economic growth remains in expansion.
  • World’s #2 Economy Also Slowing As detailed here over the last several months, the U.S. economy, the world’s largest, has been slowing, but still remains in expansion. Now the second-largest economy is also decelerating. In May, China’s factory activity fell for a third straight month, and is in contraction territory for a second consecutive month. The non-manufacturing sector of China’s economy (services and construction) is still in expansion mode, but it too has decelerated – to its slowest pace since January.

Market Summary

Asset Class Total Returns

[Market Update] - Asset Class Total Returns May 2023 | The Retirement Planning Group

Source: Bloomberg, as of May 31, 2023. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

Capital markets are beginning to realize a notable divergence between the “haves and have nots”. It has been a trend in the markets that started in January but really accelerated in May.  Basically, the market has bifurcated between giant capitalization technology and communication services companies and almost everything else in the market. As seen in the Market Summary graph above, most major asset classes were negative in the month of May. U.S. large-cap equities were the one exception in which the S&P 500 Index was able to eke out a +0.4% gain (total return with dividends) to maintain a three-month winning streak. On the other hand, U.S. small-cap stocks, as measured by the Russell 2000 Index, fell -0.9% in May, marking its fourth consecutive monthly decline. Non-U.S. stocks were down even more, with emerging market stocks (the MSCI Emerging Markets Index) down -1.7%, as China dropped -8.6%, and developed market international stocks (the MSCI EAFE Index) slumping -4.2%, the biggest monthly loss since last September.

The big outlier in global equity performance in May, and year to date, is the Nasdaq Composite Index which is dominated by the Technology sector. With dividends included, the Nasdaq was up +5.9% in May, a stark outlier from all the other global equity indices. To say the market’s leadership is narrow is an understatement. Though the S&P 500 was positive in May, only 3 of the 11 sectors enjoyed gains, with Technology up +9.3%, Communication Services up +6.2%, and Consumer Discretionary up +3.1%. The remaining eight sectors were down -3.5% (Industrials) to -10.6% (Energy). But even looking at sectors masks just how narrow the market leadership has been. The ten largest stocks in the S&P 500 rallied an average of +9.1% in May, while the other 490 stocks fell an average of -4.1%. The discrepancy is even greater for the year-to-date period through May. Goldman Sachs broke out 7 “Big Tech” leaders (Apple, Amazon, Microsoft, Google, Facebook/Meta, Nvidia, and Tesla) to show their 2023 performance was over +50%, while the S&P 500 overall was up about +10%, but excluding the 7 “Big Tech” stocks, the S&P 500 is essentially flat for the year. This is not usual behavior for the stock market, and the rest of the market is going to have to catch up to the handful of big tech leaders, or the market may be facing volatility as the outlier performance of the narrow leadership is reconciled to the downside and weighs the overall index lower.

In the fixed-income arena, U.S. bonds declined for the second month this year, with the Bloomberg US Aggregate Bond Index falling -1.1% in May (it also fell in February) as Treasury yields rose from the debt ceiling debate and as the market reduced expectations for future Fed rate cuts. Economic data was mixed, but Q1-2023 Gross Domestic Product (GDP) was unexpectedly revised higher to a +1.3% quarter-over-quarter annualized rate, and the labor market remained robust. The 2-year U.S. Treasury yield jumped +40 basis points (bps) to 4.40%, while the benchmark 10-year U.S. Treasury yield rose +22 bps to 3.64%. That put the 10-year to 2-year yield curve inversion at its lowest level in two months (in other words, the 2-year U.S. Treasury yield is 76 bps higher than the 10-year yield, typically, shorter duration yields are lower than longer duration yields). Non-US bonds also fell for a second month in 2023, as the Bloomberg Global Aggregate Bond ex U.S. Index slumped -2.7% in May (like U.S. bonds, they also fell in February). Non-U.S. bonds were hurt by both rising yields and a resurgent U.S. dollar, which gained +2.6% and closed at its highest level since mid-March.

[Market Update] - Market Snapshot May 2023 | The Retirement Planning Group

Source: Bloomberg, as of May 31, 2023.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes


The May Employment Report showed another solid month of labor market activity. Nonfarm Payrolls jumped by a seasonally adjusted 339,000, far exceeding Wall Street expectations for 195,000. That’s up from April’s 294,000, which was revised up from the originally reported 253,000. March was also revised higher, to 217,000 from 165,000, putting the two-month revision for both March and April at a positive net gain of +93,000 jobs. Strong hiring and historically low unemployment continue to support wages. Average Hourly Earnings were up +0.3% in May, in line with expectations, but down from +0.4% in April, which was revised down from the initially reported +0.5%. Year-over-year, Average Hourly Earnings were up a solid +4.3%, just below expectations and last month’s +4.4%. As expected, Labor-Force Participation was unchanged at 62.6%, which is still below the February 2020 pre-pandemic level of 63.3%, but at the highest level since the pandemic. There were some underlying signs of weakness in the report. The Average Workweek fell to 34.3 hours, the lowest since April 2020, near the start of the pandemic. And the Unemployment Rate unexpectedly moved higher to 3.7% from April’s 3.4%. That’s still near historic lows but above expectations of 3.5% and the highest level since last October.

U.S. Employment Remains Robust

Nonfarm payrolls, monthly change

[Market Update] - US Employment Remains Robust Nonfarm Payrolls Monthly Change May 2023 | The Retirement Planning Group

*2019 average. Note: Seasonally adjusted.
Sources: Labor Department, The Wall Street Journal


The Conference Board’s Leading Economic Index (LEI) fell further into negative territory, declining -0.6% in April and -8.0% year-over-year (YoY). The Leading Economic Index, a composite of ten high-frequency indicators, provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term –roughly 6-12 months. The April decline marks the 13th consecutive monthly decline, a streak that has only occurred during the recessions that started in 1973 and 2007. Weakness has been broad-based, with eight of the ten indicators falling in April. The Conference Board said, “the LEI continues to warn of an economic downturn this year,” and they are forecasting a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023. Historically, the year-over-year change in the LEIs shows a close relationship with the year-over-year changes in both the S&P 500 Index and the broader economy, as measured by Gross Domestic Product (GDP). When the LEI is in growth territory (above 0), the stock market tends to rise, and GDP tends to be expansionary. And when the LEI is in contraction, the stock market tends to decline, and GDP also tends to contract. Yet recently, despite a sharp and long LEI contraction, equities have been rising and GDP remains in expansion. As shown below, the current levels of LEI contraction have accurately predicted past recessions, but currently the S&P 500 (itself one of the ten components of LEI) and GDP are not corroborating the recession risk.

Leading Indicators Signal Recession

Annual percentage change, LEIs and GDP

[Market Update] - Leading Indicators Signal Recession Annual percentage change, LEIs and GDP May 2023 | The Retirement Planning Group

Sources: Bloomberg, Conference Board, Bureau of Economic Analysis


Like last month, let’s get the bad news out of the way first… an earnings recession is confirmed. Earnings for S&P 500 companies have declined about -2.7% year-over-year in the first quarter of 2023, according to data from Bloomberg. That marks the second consecutive quarterly drop in year-over-year earnings growth, which typically defines an earnings recession, and puts Q1-2023 as the first earnings recession since the pandemic. But there is good news. Wall Street expected an even worse earnings decline coming into the quarter. In aggregate, companies are reporting earnings that are +6.5% above expectations. This surprise percentage beat rate is above the 1-year average (+2.8%) and 10-year average (6.4%) but still trails the 5-year average beat rate (+8.4%). And 78% of S&P 500 companies have reported actual EPS above the mean EPS estimate, which is above the 1-year average (73%), the 5-year average (77%), and the 10-year average (73%).

Moreover, analysts are making smaller cuts than average to EPS estimates for Q2-2023. During the months of April and May, analysts lowered EPS estimates for the second quarter by a smaller margin than average. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) decreased by -2.0% from March 31 to May 31. In a typical quarter, analysts usually reduce earnings estimates during the first two months of a quarter. Over the last five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been -2.9%. For each of the past three quarters the cuts to EPS estimates were more than -5%. Given concerns in the market about a possible economic slowdown or recession, the fact that analysts lowered EPS estimates less than normal for S&P 500 companies is a positive sign.

Wall Street Analysts Making Smaller Cuts than Average to Earnings Estimates

Change in S&P 500 Quarterly Earnings Per Share (EPS): First 2 months of quarter

[Market Update] - Change in S&P 500 Quarterly Earnings Per Share EPS First 2 months of quarter May 20233 | The Retirement Planning Group

Source: FactSet.


The National Federation of Independent Business (NFIB) Small Business Optimism Index decreased 1.1 points in April to 89.0, which was below expectations of 89.7 and the 90.1 reading in March. That marks the lowest reading since 2013 as recession risks and credit conditions weighed on business owners’ optimism. Six of the ten inputs of the headline index number moved lower while only four rose. On the positive side, it was the first time since January of 2022 that Inflation is no longer the topmost important problem among respondents. In fact, inflation as the single most important problem in operating their businesses fell to its lowest level in 15 months. It is still in second place with 23% respondents citing it as the top problem, but Labor Quality has become the new single biggest business problem with a 24% response rate. “Optimism is not improving on Main Street as more business owners struggle with finding qualified workers for their open positions,” said NFIB Chief Economist Bill Dunkelberg. “Inflation remains a top concern for small businesses but is showing signs of easing.”

Business Optimism Plunges to the Lowest Level in a Decade

NFIB Small Business Optimism Index

[Market Update] - NFIB Small Business Optimism Index May 2023 | The Retirement Planning Group

Source: National Federation of Independent Business, Macrobond.
Note: shaded areas represent U.S. recessions.


U.S. home prices rose for the second straight month in March after seven previous months of declines, according to the Case-Shiller S&P CoreLogic Case-Shiller National Home Price Index. Low inventory and high demand from homebuyers has stabilized U.S. home prices as they rose a seasonally adjusted +0.4% for the month, up from +0.3% in February. Regionally, prices are declining fastest in Western markets, such as Seattle and Phoenix. On a year-over-year basis, the pace of home prices declined to +0.7% which is the slowest annual increase since May 2012. That’s notably slower than the positively revised +2.13% (originally 2.05%) annual increase for February.

Home Prices are Stabilizing Nationally

S&P CoreLogic Case-Shiller National Home Price Index, 1-month change

[Market Update] - S&P CoreLogic Case-Shiller National Home Price Index 1-month change May 2023 | The Retirement Planning Group

Note: Seasonally adjusted.
Source: S&P Dow Jones Indices, The Wall Street Journal


China’s factory activity slipped deeper into contraction in May, falling for a third straight month. The Manufacturing Purchasing Managers Index (PMI) remained below the 50 line that separates expansion from contraction for a second straight month. Meanwhile growth in the services sector slowed as well, remaining firmly at expansion levels, but showing signs that the country’s economic momentum is fading. The Nonmanufacturing (Services) PMI fell to 54.5 in May from 56.4 the previous month, which is the lowest level since January. Taken together, the weaker-than-expected numbers point to a tepid and short-lived post-Covid reopening rebound.

About that Reopening…

China’s official Purchasing Managers Indexes (PMIs)

[Market Update] - China’s official Purchasing Managers Indexes PMIs May 2023 | The Retirement Planning Group

Note: A reading above 50 indicates economic expansion, below 50 economic contraction.
Sources: China’s National Bureau of Statistics

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

[Market Update] - Asset Class Performance May 2023 | The Retirement Planning Group

Source: Bloomberg.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.