May 2025 Monthly Market Update

The month of May rewarded equity market investors who held positions through the tariff panic lows of April. Global trade remained in flux but court battles, the TACO trade, and political pressure allowed enough space in May for equity markets to find their footing. Tariff on ramps and off ramps kept policy uncertainty very elevated, similar to April, but combative U.S. trade policy became marginally less alarming in May as trade deals were aggressively negotiated but concrete deals remained elusive. The EU and UK signed a new agreement in May to ease trade restrictions and boost cooperation on security and energy in a notable post Brexit thawing of relations.

Inflationary tariff policies and intense deficit-inducing fiscal policy negotiations in Congress contributed to long term interest rates continuing to drift higher with 30yr yields breaching the 5% level for the first time since October 2023. 10yr yields increased 0.24% in May to yield 4.41% which, in turn, pressed mortgage rates up to 6.9%, closing in on the high for the year of 7.04%. Pricing of credit risk compressed in May as high yield spreads fell from 3.94% to 3.22% and investment grade spreads fell from 1.09% to 0.90%.

The S&P 500 staged its strongest monthly rally since November 2023, up 6.4%, ranking in the 92nd percentile of all months since 1953, a notable follow up to April’s tariff/trade war induced volatility.

International developed (+4.6%) and emerging markets (+4.3%) also rallied in May, continuing their impressive rally year to date where they sit up 16.9% and 8.7% respectively. From a macro perspective there were no major surprise economic reports as continued weakness in soft data (sentiment and survey measures) have yet to be confirmed with weakening hard data (payrolls, corporate earnings, growth). Close monitoring of softening growth due to higher interest rates, a sluggish U.S. housing market, weakening consumer spending, and preliminary signs of labor market softening warrant close monitoring but have yet to demonstrate sustainably negative trends.

Market Anecdotes

U.S. equity market returns relative to developed international markets requires close examination of productivity, regulation, and innovation over the long run with the former clearly outpacing the latter, despite near term performance separation.
Bespoke noted a change in equity market behavior on days where trade/tariffs/trade wars dominate the news cycle which led to notable underperformance during March (-0.45%) and April (-0.89%) but drove notable outperformance during the month of May (+1.34%).
US Treasury data show the EU, UK, Canada, and Japan as the largest holders of total U.S. stocks and EU, UK, Japan, and China the largest holders of U.S. bonds.
Gradually rising UST yields despite cooling growth, inflation, and trade tensions likely has the FOMC and investors wondering if the proposed tax cut package is stirring the bond vigilantes.
We have a stark mirror image in the first five months of the year with gold up 24.2%, its best initial five months with data back to 1975, and the USD down 8.4%, the second worst initial five months with data going back to 1967. International equities have benefited tremendously.

Bullish Asset Allocation Narratives

A stimulative U.S. budget deal and business friendly deregulation are continuing to take shape in D.C. which should bolster growth dynamics in the U.S. as long as bond markets sign off.
Trump has demonstrated a finite pain threshold with tariff policy induced angst as administration officials, financial markets, and public opinion press for resolutions to trade disputes and policy uncertainty. While not over, peak tariff panic is likely in the rear view.
Barring any inflation/interest rate surge, growth, employment, and the business cycle look to be simply cooling rather than the prevailing recession narratives which may ultimately allow the Fed to loosen restrictive monetary policy toward the end of summer/early fall.

Bearish Asset Allocation Narratives

Fundamental and technical factors in U.S. bond markets (upward pressure on rates) present unique challenges for investors and economic growth with implications across the economy.
Policy uncertainty is translating to negative business and consumer sentiment posing risks to employment (deferred hiring), business capital expenditures, and personal consumption.
The Fed may ultimately maintain restrictive monetary policy for longer than otherwise necessary due to policy uncertainty, tariff inflation pressure, and a resilient labor market.

Outlook

Equity market positioning in June remains modestly constructive, as it has throughout the year, with a tilt toward value stocks relative to growth. However, some near term consolidation is expected given the short-term overbought nature of the equity markets given the near 20% rally experienced since the April 8th low and an expectation of continued volatility inducing tariff narratives over the summer along with a delicate dance between the bond market and proposed expanded U.S. fiscal deficit spending measures. That said, until we see more established deterioration in hard economic data, it is a stay the course message with routine rebalancing into strength. From a duration standpoint, we are maintaining a neutral stance at this time as yields have remained range bound but continue to monitor U.S. fiscal negotiations and inflation impacts of trade policies.

Summary of Recent Economic Reports

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