Monthly portfolio brief

Sell in May and go away? Not this time

What you need to know

• Healthy corporate profit growth and lower bond yields led to positive returns for stocks and bonds in May.
• Improving global economic conditions helped lift international stocks higher for the month.
• We believe opportunities are more attractive in equities relative to bonds and recommend underweighting U.S. investment-grade bonds in favor of U.S. mid-cap stocks, where appropriate.
• Despite improved recent performance in emerging-market stocks, we favor the relative quality and ongoing momentum of U.S. large-cap stocks.
• We favor maintaining balanced exposure to growth- and value-style stocks.

Portfolio tip

May’s broad-based rally highlights the benefits of maintaining a globally diversified portfolio based on your long-term goals.

Where have we been?

Markets rallied in May, aided by strong corporate profit growth and lower bond yields. The adage “sell in May and go away” served as lousy advice for investors this past month. After a volatile April — which saw the S&P 500 record its first 5% correction of the year — markets rebounded in May, with stocks and bonds both finishing higher.

Strong corporate earnings trends and lower inflation underpinned the strong performance in stocks and bonds. Each of our recommended asset classes finished higher in May, led by U.S. large- and small-cap stocks.

Equities recouped April losses on the heels of rising earnings.The rally in stocks was broad-based in May, with each of our recommended equity asset classes finishing higher. Ongoing momentum in U.S. large-cap stocks was on display, as robust earnings growth in mega-cap technology stocks led to a 5% gain in U.S. large-cap stocks. However, leadership was broad-based, with sectors such as utilities and real estate, along with U.S. small-cap stocks, among the top performers.

Developed international stocks saw strong returns in May as well, as signs emerged that economic activity in Europe is beginning to improve after several quarters of stagnation. Emerging-market stocks also saw positive returns in May, marking the fourth consecutive month of gains. A softer U.S. dollar provided additional support to international equity returns.

Lower yields supported bond returns. Lower U.S. inflation drove bond yields moderately lower for the month, leading to positive returns for each of our recommended fixed-income asset classes. U.S. investment-grade bonds returned 1.7% for the month and are higher by 6.6% since October 2023, helping recover some of the losses from the past three years.

Lower-quality bonds performed well this past month and continue to lead over the past year. U.S. high-yield bonds gained 1.1% in May, while emerging-market debt rose by 1.7%. U.S. high-yield bonds have gained over 11% in the past year, as resilient economic activity has supported lower-quality issuers.

What do we recommend going forward?

Consider opportunities to overweight U.S. equities. We don’t doubt that volatility could resurface this year, particularly if election and central bank policy uncertainty spur bouts of weakness. We do, however, believe the backdrop of strong corporate profits and potentially moderating — but healthy – U.S. economic growth will prevent any pockets of short-term volatility from evolving into a more severe downturn.

• We favor U.S. mid-cap stocks relative to U.S. investment-grade bonds. We expect U.S. economic growth will moderate from the above-trend rates achieved in the second half of 2023. However, we expect inflation will trend lower, paving the way for one or two Federal Reserve interest rate cuts in the second half of 2024, which could support economic activity later in the year. 
  
  We expect this backdrop to be supportive for equities, with U.S. mid-cap stocks offering a balance of quality and cyclicality to potentially benefit from an acceleration in economic growth later this year and into 2025.
• Despite improved performance in recent months, we support underweighting emerging-market stocks in favor of U.S. large-cap stocks. Emerging-market stock performance has improved in recent months, aided by strong gains in Chinese stocks, which have rallied over 10% from their February lows. The catalyst behind the move in Chinese stocks has been a ramp up in stimulus measures from Chinese policymakers to support the country’s depressed housing market. 
  
  Despite these measures, our view is that economic and corporate fundamentals in emerging-markets — and particularly in China — have yet to improve meaningfully. We favor the relative quality and earnings growth potential of U.S. large-cap stocks.
• Balance exposure between growth and value stocks. Growth-style equities have outperformed over the past 12 months, driven by enthusiasm around the growth potential of artificial intelligence (AI) and robust corporate profit growth in mega-cap technology companies. We expect excitement around AI to continue. But we believe lower inflation, potential Fed rate cuts, improving manufacturing activity and a narrowing in the earnings growth advantage of mega-cap tech versus the rest of the market could support more balanced performance between growth- and value-style stocks. Therefore, we favor a neutral allocation to both growth- and value-style stocks.

Consider positioning fixed-income investments to benefit from central bank rate cuts down the road. Rising interest rates have pressured returns across most fixed-income asset classes over the past three years. However, we see limited upward pressure on yields from current levels, based on our expectation for inflation to trend gradually lower and central banks to ease monetary policy later this year.

• Increase duration within U.S. investment-grade bonds. With potential Fed rate cuts on the horizon, we believe opportunities are most attractive in intermediate- and longer-term U.S. investment-grade bonds relative to short-term bonds and cash-like instruments. While the yields on short-term bonds and cash are attractive, these investments carry greater reinvestment risk. Longer-term bonds allow investors to lock in today’s higher rates for longer.
• Favor emerging-market debt over U.S. high-yield bonds. Over the past year, U.S. high-yield bonds have been the best-performing fixed-income asset class, supported by resilient economic conditions that aided lower-quality issuers. With U.S. high-yield credit spreads well below historic averages, we see limited scope for spreads to compress from current levels. 
  
  Emerging-market debt is generally higher-quality than U.S. high-yield bonds and carries more interest rate sensitivity, potentially benefiting if interest rates drift lower. We support underweighting U.S. high-yield bonds in favor of emerging-market debt.

We’re here for you

Well-diversified portfolios benefited from the broad leadership in May. Review your portfolio’s investment mix with your financial advisor to ensure it’s aligned with your long-term goals. Then, discuss how strategic diversification paired with opportunistic adjustments can help you stay on track.

If you don’t have a financial advisor and would like help identifying an appropriate investment strategy aligned with your risk and return objectives, we invite you to meet with an Edward Jones financial advisor to discuss what you find most important when it comes to your financial goals.

Strategic portfolio guidance

Defining your strategic investment allocations helps to keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity style, U.S. equity sector and U.S. investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.