May turned out to be a lackluster month a lot of stock market investors would probably rather forget. Arguably, though, it’s one worth remembering, if only for the lessons it provides.
Stocks fell sharply over the course of May, clobbered by geopolitical turmoil, a Fed that resisted calls to get more dovish about rates, and an earnings season that showed corporate results generally hitting the brakes after last year’s double-digit gains.
All of this helped lead to what might be called a “repricing” of stocks and a steady movement of many investors into what they conceivably saw as less dangerous assets, like Treasury bonds. In a repricing, investors collectively conclude that stocks might be priced for a better outcome than many now expect, and values tend to come down to reflect that new reality.
As May began, the S&P 500 Index (SPX) had a price-to-earnings valuation of near 17 on a forward basis, up from around 14 back at last December’s lows and just above long-term averages. By the end of the month, that P/E was down at around 16, not a huge drop but definitely a significant one for just 20 trading sessions (through midday May 29).
May Stock Market Lessons 101
So what can investors learn from this rough stretch, aside from the fact that trade battles and Fed resistance to calls for rate cuts tend to weigh on the market?
First, May arguably showed us that there’s still a huge sense of caution out there. There seems to be a feeling that any negative news, whether it’s related to the Fed, trade, or earnings, has a chance to signal pending economic softness. It’s been a decade since the last recession, and many people apparently see the next one hiding in the shadows, ready to jump out and