Monthly Market and Economic Update - May 2025

Current Market and Economic Conditions

• For May, the S&P 500 Index was up 6.29%, while the Bloomberg Barclays US Aggregate Bond Index was down 0.72% and the Bloomberg Barclays Municipal Bond Index was up 0.06%.¹
• The stock market continued to recover from the tariff turmoil in April. The market is getting acclimated to the almost daily policy updates. The bond market reacted cautiously to the budget bill passed by the House as some are concerned about rising debt levels over the long term.
• The Federal Reserve is taking a calculated approach as they balance monetary policy action against the competing risks of potentially higher inflation with the possibility for slower economic growth.

Bond Market

• The Federal Reserve has held short-term interest rates steady as the current data still supports continued economic growth with moderating inflation. The Fed Fund futures market is forecasting that the Fed may not cut rates until September and perhaps again in December.² The futures market is projecting a slowdown in the economy will likely take priority over fighting inflation prompting action by the Fed, although the timing of the potential slowdown is uncertain at this point.
• The uncertainty in direction of the economy going forward is not based on the current data. It is based on how the tariffs may cause an economic slowdown as they potentially ripple through the economy. The best scenario for the bond market at this point is that the enormous tariffs announced in April will be paused for longer and the impact on goods flowing into the US is temporary.
• The budget bill passed in the House has caused longer-term bond yields to rise as concerns have increased regarding the escalation in the US government debt caused by the legislation. The Senate is working on their version of the budget bill, so the final impact has yet to be determined.
• For bond investors, the recent fall in interest rates has meant a rise in bond values and a positive total return year to date. Also, due to the higher relative bond yields any change in interest rates whether up or down will have less impact to bond values than when the starting yields were much lower a few years ago.

Stock Market

• The stock market, as measured by the S&P 500 index, has recovered from the near bear market lows in April.¹ The market is acclimating to the almost daily trade policy updates. The steady stream of delays and reductions have caused the market to focus on more typical factors like earnings growth and the direction of interest rates. With the Fed on pause and the impact on earnings minimal, the market is finding opportunities for growth.
• International stocks have been the surprising winner of the market so far in 2025. The MSCI EAFE International Index is up over 16% year-to-date.¹ As the trading partners have shifted and investors have looked for cheaper stocks, international stocks are looking like a bargain trading at a 33% price-earnings discount to US stocks.³ This also confirms that the market looks for opportunities to buy stocks cheap during stressful times and that diversification is an important key for long-term investors. Market leadership changes quickly and without much notice. Diversification means that investors are properly positioned when this happens.
• Investors typically shy away from uncertainty, especially when stock prices are elevated. Historically, markets often experience heightened volatility and weaker performance during the first 18 months of a new administration—regardless of which party is in power—as investors adjust to changes in fiscal policy. Expectations for the new administration have included pro-growth initiatives such as deregulation, tax cuts, and stable energy prices and interest rates. However, the early focus on implementing tariffs has sparked market concerns, as these measures may dampen short-term economic growth and contribute to inflationary pressures. If the administration shifts its focus back toward growth-oriented policies, the market could regain its footing. For now, both investors and the Federal Reserve are adopting a cautious stance, watching for signs of stagflation—slower growth combined with rising inflation. In times of market turbulence, it is important for investors to maintain a long-term perspective and consider using short-term volatility as an opportunity to rebalance portfolios in line with their risk tolerance.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors. Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.

Please contact your Advisor if you have questions or concerns.