That screeching sound you heard in May? That was the stock market.
While the month ended with four days of gains in most of the indexes, concerns about high gas prices, tornadoes and flooding in the South, the post-natural disaster slowdown in Japan and the debt crisis in Europe sent the Standard and Poor's 500 stock index down 1.4 percent in May. That decline followed a 2.85 percent increase in April, which followed gains that set the fastest pace in the first quarter since 1998. Before this month, stocks were boosted by higher corporate earnings, increased business spending and a global economic expansion.
May was the first down month for the S&P since August 2010.
Other risky assets also saw declines in May, following a year of increases. The prices of commodities like oil, cattle and coffee fell by an average of 7 percent. Meanwhile, Treasury bond prices, which tend to rise when investors fear that the economy is slowing, rose to near their highest level of the year.
For Tuesday, the stock market ended higher, on signs that Germany might drop its demands for an early rescheduling of Greek bonds, paving the way for a deal that could prevent Greece from defaulting on its debt. The S&P index gained 14.10, or 1.1 percent, to 1,345.20. The Dow Jones industrial average added 128.21, or 1 percent, to 12,569.79. And the Nasdaq composite rose 38.44, or 1.4 percent, to 2,835.30.
These gains came in spite of another grim report on the U.S. housing market. Home prices in in 12 of the 20 cities tracked by the Standard & Poor's/Case-Shiller index dropped in March to the lowest levels since the housing bubble popped in 2006. "Home prices continue on their downward spiral with no relief in sight," said David Blitzer, chairman of the index committee at S&P Indices.
Oliver Pursche, president of Gary Goldberg Financial Services, said the report didn't hurt investors' confidence much because their expectations for the U.S. housing market were already low.
"There's no shock factor there," Pursche said. "We knew it was going to be bad, and it is."
Even so, the month of May was an unhappy one for stockholders for the second year in a row — although the losses weren't nearly as bad as they were last year. Just like 2010, when the S&P index lost 8 percent in May, Greece said that it will need outside help from other European Union countries to meet its debt payments. And in the U.S., the domestic economy sputtered again. Thirteen economic indicators, ranging from personal spending to manufacturing orders, were weaker than economists had predicted, a sign investors and analysts say indicates that high gas prices are slowing growth more than anticipated.
Some investors believe that May was merely a short-term dip_and given the news of the month, markets could have seen bigger declines. "(Stocks) held up reasonably well this month, given all that the market had to digest in terms of worries," said David Kelly, chief market strategist at J.P. Morgan Funds.
Kelly and others say that lingering good feelings from a strong earnings season, in which the average company beat Wall Street's quarterly earnings expectations by more than 6 percent, were part of the reason the broad market didn't decline further. Another reason, Kelly says, is the belief "in the market that any of the slowdown in the economy is relatively temporary."
One-time factors like bad weather and problems with getting parts from Japan, along with a sharp upturn in investments by private companies, all suggest that the economy will continue to grow this year despite recent signs of weakness, Kelly said.
The few industries that performed well in May were so-called defensive ones like health care and utilities that have stable earnings because the items they sell are not luxuries. Consumer staples — companies like PepsiCo and Costco Wholesale that sell everyday items like soda and diapers — rose nearly 2.5 percent, the most out of any group.
June should provide some answers as to whether the economy truly is slowing down. Economists expect that Friday's jobs report will show that the unemployment rate fell to 8.9 percent in May from 9.0 percent in April. And at the end of the month, the Federal Reserve will end its bond-buying stimulus program, QE2. The program has kept interest rates low, which makes owning riskier assets, like stocks or commodities, more attractive.
Some investors believe that the end of the Fed's stimulus program is already reflected in stock prices. "The market looks ahead six to nine months, so if the market thought the end of QE2 was going to be harmful we would have felt it already," said Peter Maris, the founder of Resource Financial Group, a financial adviser in Wilmette, Ill.
The S&P index has risen 7 percent this year, before dividends. At this point it would take an 87.56 point drop for it to turn negative for the year. The Dow would need to drop 992.28 points to erase its 8.6 percent gain for the year.