Global Equity Markets Find Buyers
Global stocks rose in tandem in May, as the S&P 500 index (+6.3%), Russell mid-cap index (+5.7%), Russell 2000 index (+5.3%), MSCI EAFE index (+4.7%), and the MSCI EM index (+4.3%) all exhibited gains between 4.3% and 6.3%. Markets are repricing the implications of tariffs as trade negotiations change the outlook daily. Driving returns in the U.S. was growth stocks as the technology sector has not been as affected by tariff policy than originally expected. Despite the significant drawdown of growth stocks in April, returns are positive on a 3-month, year-to-date, and 6-month basis. Stocks will continue to price in any changes in trade policy.
Source: Bloomberg, 05/31/2025
Interest Rates Remain Volatile
The 10-year Treasury yield increased about 0.25% to a level of 4.42% as investors tried to assess the implications of U.S. government deficits, U.S. bond downgrade, and rising inflation. The tax and spending bill, dubbed as the “big, beautiful bill”, has sparked concerns that the gap between spending and revenue will continue to widen. Also, Moody’s downgraded the United States’ credit rating. While this downgrade doesn’t change much in the eyes of investors, it does bring the government debt levels to the forefront. Because of this rise in interest rates, higher rated bonds with longer maturities that are sensitive to interest rates underperformed lower credit rated bonds with shorter maturities.
Inflation Normalizes in April
Despite consumer categories most affected by tariffs, annual consumer price increases in April dropped to a level of 2.3%, compared with 2.4% the month prior. Continued deflationary pressures in travel-related categories and other recreational services offset the price increases in goods most affected by tariffs. For example, categories such as furniture, appliances, and sporting goods exhibited price increases of about 1% from a month earlier, while service prices of airfares and hotels declined -2.8% and 0.2%, respectively. One component to watch was shelter costs, which has been contributing lately to the deflationary impulse, shifted gears in April, rising more than 0.3%.
Consumer Confidence Follows Markets Higher
Spending intentions continue to follow tariff headlines. The Conference Board’s Consumer Confidence Index, a representation of consumers feelings, improved to 98.0 in May, which is closer to levels last seen in March. Driving confidence was expectations surging on better business conditions, labor market and income prospects. About 19.2% of consumers expect more jobs six months from now, compared with 13.9% a month prior. These factors support purchasing plans to buy big-ticket items such as appliances and electronics, in addition to purchases for homes, cars and vacations. If there’s a sharp recovery in employment and income expectations, spending plans should be able to withstand the sharp effect of trade policy.
Federal Reserve Steadfast Amidst Tariffs
The target policy rate of the Federal Reserve was kept unchanged at an upper bound of 4.5% at the May 6-7 meeting, noting that “risks of higher unemployment and higher inflation have risen.” However, Federal Reserve chair Jay Powell characterized the economy as remaining solid and saw little hard data that reflect the weakness showing up in household sentiment data. A change in tune centered around inflation, with Fed chair Powell noting that further progress on inflation won’t occur for another year because of goods inflation. The market expects the Federal Reserve to cut its target policy rate twice by 0.25% in 2025, despite increasing concern of an economic slowdown and rising inflationary pressures.
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