May 2021 Monthly Market Review
The first CPI release with the ominous base effect was reported in May. On a year-over-year basis, consumer prices rose 4.2% in April and core prices, which exclude the often-volatile food and energy categories, rose 3.0%. Results were higher than markets expected, which led to some unusual market dynamics in May. Gold, as well as other inflation-hedging assets like real estate and commodities, delivered strong returns. The U.S. dollar (USD) declined against a majority of developed and emerging markets (EM) currencies, which helped international and EM equities outperform their U.S. counterparts. The yield curve flattened despite higher realized inflation, suggesting the market believes the Fed’s rhetoric that near-term inflationary pressures are transitory. During the month, Amazon announced it would acquire MGM, which was a positive development for a number of hedge fund managers.
Demand across a broad basket of commodities (+2.7%), as well as related refined products, outstripped supply during the month. A weaker dollar, which makes commodities less expensive for foreign currency holders, provided a tailwind to prices overall.
Gold rallied 7.7% after core CPI for April increased 0.8% month-over-month (+4.2% year-over-year) and as investors positioned portfolios for the prospect of higher inflation and Chinese consumer and investor demand increased. Gold has historically outperformed during periods of high inflation (more than 6%) and underperformed during periods of moderate and low inflation. Despite the strong monthly return, the precious metal is up just 0.5% year-to-date, trailing a broad basket of commodities that returned 18.9% over the same period.
Robust economic growth, continuing vaccine rollouts, and a third round of stimulus checks helped drive another strong month for pro-cyclical categories of real assets. Resource equities (+7.1), metals and mining equities (+6.6) led the way. The traditional energy sector benefited from another positive month for oil prices (+4.3%) and a strong recovery in earnings during the first quarter. These advancements came despite multiple boardroom defeats for oil majors with respect to climate-related investor concerns.
Mining equities also moved higher on robust earnings, expected increases in dividends, and investors positioning portfolios for potential inflationary pressures. Steel and copper prices reached all-time highs in May, which supported the increase amidst a backdrop of short-term bottlenecks, cyclical demand growth, and favorable longer-term secular trends.
Elsewhere, real estate sectors that were hardest hit by the pandemic were some of the top performers, with retail malls up 5.9% and traditional apartments growing 2.8%. Regionally, Europe outperformed as COVID-19 restrictions in many countries were lifted and vaccine efforts, which have lagged the United States, gained momentum.
Outside of 12 currencies (two developed, 10 EM) that fell against the USD, the U.S. posted another month of general weakness. Relative purchasing power parity (PPP) suggests that countries with higher inflation will experience a depreciating currency. Inflation data from the Organisation for Economic Co-operation and Development (OECD) showed the U.S. posted higher inflation than the OECD as a whole and higher inflation against all developed countries and a majority of EM countries as well.
Equity markets outside the U.S. enjoyed a strong month, besting their counterparts in the United States. The MSCI EAFE Index rose 3.3%, driven by strength in Europe (+4.2%). European equities posted their fourth consecutive monthly gain as vaccination efforts across the region accelerated and COVID-19 infections dropped at the end of the month, sparking hopes of a broader reopening soon. Japan (+1.6%) again lagged as the country extended its state of emergency in Tokyo and other impacted regions. Segments of the market levered to economic reopening fared well in this environment. Examples included traditionally more cyclical sectors such as financials (+4.9%) and energy (+3.9%). Certain areas within the consumer space, such as autos (+9.0%) and luxury goods (+11.0%), also rallied on improving economic sentiment. Communication services (–0.2%) was the only sector to register a loss as global wireless players Softbank (–16.6%) and Vodafone (–3.7%) faltered.
Emerging markets finished on the heels of non-U.S. developed equities, gaining 2.3% (USD). Country and sector performance also reflected continued recovery in cyclical companies, aided by global progress toward reopening. By sector, energy (+8.3%) and financials (+6.0%) were the top performers. Traditional growth sectors such as IT (–0.1%) and consumer discretionary (–1.4%) pulled back as investors rotated out of many of the Chinese growth trades such as Alibaba (–5.8%) and Pinduoduo (-6.8%). Country performance shared a similar pattern. Commodity-related countries such as Brazil (+9.6%) and Russia (+9.5%) bested tech-heavy markets such as Taiwan (–1.2%), which was further pressured by rising COVID-19 cases. After successfully containing COVID-19 in the first wave, news of potential lockdown measures weighed on Taiwan’s equity market. This contributed to an 8.4% intraday decline in the country’s TAIEX Index on May 12th, marking its largest intraday decline in roughly 50 years.
Even with the unexpected rise in inflation, Treasury yields drifted lower in May. The front end of the curve remains anchored at the zero lower
bound, while Treasuries from the five-year tenor to the 30-year tenor fell between 4 bps and 6 bps, respectively. The bullish flattening of the yield curve led to a 0.5% gain in long Treasuries. The flattening of the curve helped foster a 1.1% gain in long corporate bonds, which was the best performing sector in the U.S. bond market.
Amazon announced the acquisition of MGM in late May for $8.45 billion. MGM has been privately held by a small group of hedge funds, notably Anchorage Capital and Davidson Kempner, since it emerged from bankruptcy in late 2010. The movie studio’s key asset is its vast library of movies, which includes the distribution rights for the James Bond franchise. It also owns the Epix cable channel, as well as notable TV shows such as Shark Tank and The Real Housewives. MGM was rumored to be on the market for many years as the ownership group sought to monetize its investment at an attractive price amid the ongoing push for content amongst streaming services. The Amazon/MGM deal will likely take six to 12 months to close and will need a variety of regulatory approvals. At the announced deal price, hedge funds that acquired equity in MGM through the bankruptcy process in 2010 will reportedly earn a gross multiple of more than 3x their initial investment.