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Monthly Market Review - May 2023

Published on
June 12, 2023

Welcome to the Muslim Money Experts’ monthly market review, an analysis of global market performance. In this series of monthly blogs, we explore the implications of current economic data and changing market conditions that help you better understand the markets and support your investment decisions.

The month of May 2023 was characterized by shifting preoccupations, as the market looked for direction to navigate a wide variety of different viewpoints. The MSCI World Islamic Index fell by 1.8% in May, while the Dow Jones Sukuk Index fell by 0.4%, as many investors took their opportunity to sell their positions and lock in their year to date gains.

Entering into the month, there had been ongoing debates about whether the global economy was headed for a recession, whether global markets were adequately pricing the recession risk, and whether the various central banks would respond to the perceived risks with rate cuts or additional hikes over the remainder of the year.

As the US government reached a standstill in discussions to raise the debt ceiling (the maximum amount of money that the United States can borrow cumulatively by issuing bonds), those who had been pessimistic in their outlook, as well as some of the optimists who were caught off guard, reacted strongly to the possibility of the US government defaulting as it seemed to suggest that the markets were on shaky ground.

Perhaps it was due to the ability of the debt ceiling standoff to speak to each side of the surrounding economic debates that it was such a compelling story for most of the month, despite the fact that the politicians publicly never really doubted that they would reach an agreement in time.

With the rise in US government bond yields resulting from the standoff, Sukuks had a challenging month as with the rest of the bond markets. With the end of the rate hiking cycle appearing near at hand, now may be one of the best times to buy Sukuks.

As the markets started to experience a sense of relief that the debt ceiling standoff was getting resolved, the focus shifted to the surprising strength of big tech earnings as a result of the adoption of artificial intelligence products and services. The share prices of many of the tech companies started to skyrocket. As the month wound to a close, market participants wavered back and forth on how much growth from AI should be priced in.

As there was already debate on whether the markets were adequately pricing recession risk, now with the AI craze the market began making direct comparisons to the tech bubble in the early 2000s. This fueled both the pessimism about the tech bubble eventually bursting and the optimism about how much runway still lies ahead before there are any real concerns about being in a bubble.

All told, the S&P 500 finished relatively flat for the month having risen 0.3%, while the MSCI All Country World Index ex-US finished the month down 3.6% as possible concerns about a US government default led to a market pull back after strong year to date performance heading into the month.

Meanwhile, in China, the situation is not nearly as rosy. Market participants expected that the end of China’s zero Covid policy would result in an economic boom, but the economic and earnings data were fairly disappointing in May.

It continues to be important to differentiate where different countries are in their economic cycle, as central banks and governments are likely to adapt their policies to their countries’ unique situations, which reinforces the case for regional diversification to capture buying opportunities that may arise.

With the US equity markets continuing to rally even as interest rates have been going up, the possibility that the US might not end up in a recession is up for debate, whereas before a recession appeared to be a certainty.

It is considered a Goldilocks (“just right”) scenario if central banks manage to bring inflation down without causing a recession and then lower rates, and if that happens it may result in markets being priced for perfection. In such an environment any earnings disappointment can be disastrous for stocks, which is another reason why it is important to have a diversified portfolio.

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