Sizzling Spring

Quick Take: Stocks rallied back toward all-time highs, fueled by optimism from economic data and easing trade tensions. The prospect of higher government deficits weighed on long-term bonds.

 

Stocks posted a blistering rally in May, with the S&P 500 registering its best performance in the month of May since 1990.[1] The equity index gained 6.2% for the month, ending the month just 4% shy of February’s all-time high.[2]

Source: https://www.bloomberg.com/news/articles/2025-05-30/s-p-500-s-banner-month-faces-off-with-june-s-lackluster-record

Tech stocks outperformed, pushing the Nasdaq up 9.6%. The S&P 500 and Nasdaq enjoyed their strongest monthly gains since November 2023, supported by encouraging inflation data and easing trade tensions.[3]  Sentiment improved as the U.S. and U.K. reached a framework for a trade deal and tensions with China de-escalated.[4],[5], [6]

Source: https://www.wsj.com/finance/investing/why-this-stock-market-makes-so-many-of-us-want-to-scream-fffd75d4?mod=wknd_pos1

Treasury bond investors faced their first monthly loss of the year in May, primarily on increasing concern over the national debt outlook.[7] A Bloomberg index of US government bonds fell by more than 1.2% over the month.[8] Yields rose across maturities (prices fell) with two-year note yields posting their first monthly increase this year, while 30-year yields climbed for the third month in succession.[9]

Upbeat Reports Support Stocks

Source: https://www.ft.com/content/5ab8bce3-e3d9-48b8-a3a3-d8a563447ca8

Stocks kicked off the month of May by erasing the April losses triggered by global tariff announcements, after another strong jobs report.[10] Although job growth slowed from the previous month, the 177,000 new jobs exceeded forecasts of 135,000.[11] This positive outcome came despite mass firings initiated by the Department of Government Efficiency (DOGE), which reduced federal government employment by 9,000 in April and 26,000 since January.[12]

On the trade front, the US and China notably agreed to temporarily slash tariffs, de-escalating the policies that had essentially put a hold on bilateral trade.[13] US tariffs on Chinese goods came down to 30%, and Chinese tariffs on US imports were cut to 10%.[14] This surprise development gave equities their biggest lift since April 9 when global tariffs were paused for 90 days.[15]

While tariff uncertainty is far from over, markets seem to expect that the worst of tariffs have passed. This reflects the belief that tariffs can be walked backward in the face of market and economic pressure. A recent example came when 50% tariffs on the EU were threatened due to a lack of progress, only to be postponed until July.[16]

Towards the end of May, back-and-forth court rulings on the legality of the tariffs kept the market on edge, prompting volatile price action.[17]

A federal trade court blocked many of the global tariffs issued on a global basis, though those tariffs were temporarily reinstated by an appeals court as the administration challenges the initial ruling.[18] 25% tariffs on auto imports, steel, and aluminum were not affected.[19] This matter will likely eventually be taken up in the Supreme Court. If the court ruling against the tariffs prevails, the President still has several other authorities to impose tariffs, though they may not end up being as broad or aggressive.[20]

Deficit Concerns

As equity markets soared, bond markets softened as they eyed the growing US national debt. Citing concerns about American debt and interest rates, Moody’s downgraded the credit rating of the U.S. from Aaa to Aa1. [21] The downgrade was not really a surprise — Moody’s was the last credit rating agency that still rated the U.S. Aaa. [22]

Not long after, the House of Representatives narrowly passed the President’s tax cut bill. [23] The bill could add $3.7 trillion to the national debt, while the global appetite for US assets has been dimming.[24],[25]

With yields on benchmark 30-year Treasuries moving above the key psychological level of 5% — and just short of a two-decade high — the fallout also weighed on stocks and the dollar.[26]  When deficits grow, investors may demand more interest in return for loaning the government money, which lowers bond prices. As the bill goes to the Senate, the bond market will have its own vote on the plan.

Rates on Hold

Given uncertainty in the policy and economic outlook, we’ll be monitoring the next Federal Reserve meeting on June 17-18.[27]  Key focus areas include the Fed’s new projections for inflation, employment and economic growth, as well as the projected path for interest rates.[28]

Inflation has moderated, according to April Personal Consumption Expenditure data that clocked in at a 2.1% annual increase, down from 2.3% in March.[29]  This aligns closely with the Fed’s 2% target.[30]

Just in time for the summer season, consumers are also seeing some relief at the gas pump.[31] On one of the biggest weekends for road trips of the year, Gas prices during Memorial Day weekend were the lowest since 2020, thanks to a 20% decline in crude oil over the last year.[32],[33]

Minutes from the May Fed showed the Fed grappling with potential inflationary impacts of tariffs.[34] The Federal Reserve has maintained its benchmark interest rate in the 4.25%-4.50% range since December. Fed officials have reiterated the need for more clarity on fiscal and trade policy before they will consider lowering rates again.[35] Interest rate futures are now pricing in virtually no chance of a cut until after the summer.[36]

What’s Next

In times of market volatility and economic uncertainty, it’s natural to wonder – and worry – about market positioning. A skittish investor might have felt justified in pulling assets from the market in early April and then missed the snapback that followed. With the benefit of hindsight, recent market price action is an important warning against hanging your fortunes on transient short-term movements. Sticking with a disciplined long-term investment approach remains the most reliable path to achieving financial goals.

We monitor market developments closely and remain committed to working with you to stay true to your financial goals.If you have any questions or would like to schedule a mid-year review, please don’t hesitate to reach out. Please note that our office, as well as the markets, will be closed next Thursday, June 19th in observance of Juneteenth.

Congratulations to our graduates and wishing all the fathers and father figures in our lives a happy Father’s Day. We recognize and appreciate all your strength and support.

Whether you’re staying close by or traveling afar, we wish you all a sunshine-filled summer!

Your Friends at JSF