Trading in May was quite a roller coaster for investors, swinging from optimism to pessimism at different times. Economic reports remained mixed throughout the month, although there was every indication that a recovery is in place. In fact, economic numbers began to get better as the month came to a close, although it didn't matter much to stock investors who were deep in pessimism at month end. The FOMC meeting on May 7th didn't shed much light for the stock market. The Fed made no moves on interest rates and seemed to indicate they weren't ready to begin raising rates right away.

The month of May began okay, helped by positive momentum from the last day of April. But negative corporate earnings reports early in the month quickly derailed the momentum. Much like the month before, investors remained pessimistic about corporate profits despite positive news on consumer spending, consumer sentiment and manufacturing. The best trading day of the month turned out to be May 8, when sharply positive news came out of the microchip sector. The Dow Jones Industrials moved comfortably above the 10,000-point level, but the day's momentum could not be sustained as concern re-emerged over possible terrorist attacks. The next two weeks were mixed, as major indices rose on positive earnings before falling back below May 1st levels.

Earnings in technology and telecommunications stocks were mixed. Despite several very positive trading sessions, the general weakness of the group still bothered investors and sent the NASDAQ to a loss for the month. Retailers had a difficult May as bad weather early on kept consumers out of stores, yet through the course of the month the group benefited from the mostly positive macroeconomic data. Energy stocks gained for much of May as oil prices began to creep higher. Health care and housing-related stocks were still the best bets to invest in as these sectors have been performing consistently better for the past few months, despite some slower economic reports on the housing sector. The financial sector was actually up for most of the month as the economy kept showing signs of a fair recovery. Travel and leisure stocks were able to build on April's positive performance to once again be a sector worth investing in, as consumers are finally starting to spend some money. Among transportation stocks, the airline industry posted increases as consumers locked in discounted airfares for their summer vacations. Automobile stocks didn't move much from their April levels.

Day-by-day the market was a see-saw. The best performances, May 8th and May 14th, came on days when major technology firms and major retailers showed positive earnings. The last two weeks of trading were particularly weak, with seven of the last nine trading days in the red. The Dow closed the month with only a 0.2 percent loss, while the NASDAQ recorded a decline of 4.2 percent. The S&P 500 also declined, finishing down 0.9 percent for May and remaining below levels not seen since the September 11th disaster. The Russell 2000, after being the only major market index to show a gain in April, fell back by 4.5 percent in May. The market-encompassing Wilshire 5000 index showed a decrease of 4.9 percent for the month.

Treasury Markets:
Still a safe haven...
The Treasury market was mixed for most of the month. Treasury yields began to rise early in May as economic data pointed to a firm inflation-free recovery, in turn lowering the demand for risk-free investment. But the geopolitical troubles in the Middle East and between India and Pakistan soon raised demand for Treasuries, though this was often offset on those days when the stock performed well. Economic reports during the month pointed to a soft recovery. Although the economy is moving at a slower pace than hoped for by stock market players, slower rates of growth tend to be friendly news for the bond market. The final days of the month saw stronger-than-expected consumer sentiment and manufacturing figures, which hurt bond prices.

At the FOMC meeting on May 7th, the Fed made no moves and still showed no signs of wanting to raise interest rates. Commentary from Fed members and Chairman Greenspan was slim. The final few weeks of May saw increased interest in the Treasury market as the stock market performed quite negatively.

As can be seen in the chart above, yields declined slightly in May. The mid-month figures saw a large upward-trend in yields, as the stock market performed better during this time period. The general pessimism in equities and on the state of the recovery helped keep Treasuries up in May. The 30-year bond did not trade well in May, and actually showed a rise in its yield of 2 basis points. The 10-year note decreased by 5 basis points, while the 5-year note decreased by 6 basis points. The 2-year note had been outpacing the other securities, but it declined by 4 basis points in May. The 3-month bill showed similar declines for the month as it fell 6 basis points.

Damir Fonovich, Economist, Econoday