Stocks staged a strong rebound in May after a pullback in April.
The Dow, S&P 500, and Nasdaq Composite reached record highs in May.
However, amidst this bullishness, there are weaknesses in the majority of the stocks. The markets appear to be driven by the AI theme alone once more.
After Nvidia’s stellar results pushed its shares above the symbolic $1,000 mark, the share price surged 20% in one week. However, if you look at the rest of the Magnificent 7, their returns are rather pedestrian. AAPL, GOOG, and AMZN were down, while META, MSFT, and TSLA gained slightly.
The map of 1-week returns shows a sea of red, indicating that stocks are generally down unless they are linked to the AI story.
We are entering a generally weak period as summer approaches, with people taking holidays and potentially reducing trading activity. For example, the recent rise in the S&P 500 occurred with declining volume, which is not a good technical sign. It is challenging for a rally to sustain when there is insufficient buying demand.
The Dow was hit the hardest, with the index down 2.66% in a week. At least the S&P 500 and Nasdaq 100 managed to eke out gains. This isn’t surprising, as the Dow has the least exposure to AI.
In terms of sectors, only Tech and Communication Services (which includes tech stocks like META and GOOG) were up. Real Estate, Financials, Healthcare, and even Consumer Staples were down more than 2% in a week.
Moreover, some powerful brands in Consumer Staples were hammered by more than 4%, including Mondelez, Hershey, Hormel Foods, Tyson, and Target. It looked as though the stock market had crashed.
Beyond that, it appears that stocks are reacting once again to the prospect of high interest rates persisting longer.
This impacts real estate and financials more acutely, explaining their decline for the past week.
The unresolved issues in the US commercial real estate sector contribute to the larger losses in companies like Boston Properties (-6.83%) and Realty Income (-6.37%).
Banks face deeper and longer-term paper losses on their treasury holdings, raising fears of potential bank runs. Consequently, Charles Schwab, KeyCorp, and Comerica saw their stocks fall by 10.28%, 7.38%, and 5.84%, respectively.
I don’t think a repeat of the March 2023 bank collapse is likely. The weakness in the market is probably due to lower demand and reduced trading interest. It is not a bear market, but don’t expect too much excitement in the market either as we head into the June summer holidays. And no, I don’t subscribe to the ‘sell in May and go away’ mantra.
