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May Recap and June Outlook
As Father’s Day approaches, we can look back on May as a month of differing perspectives. Markets turned positive on a belief that a solution to tariffs would be eventually forthcoming, and the continued whipsawing headlines began to have a muted impact. For good or bad, the market seems to have taken what has been coined a TACO (Trump Always Chicken Outs) attitude. While I like the moderation on tariffs, I hope this tagline does not have a negative impact on policy. Regardless, the market has become more comfortable with the tariff outlook and that cooler heads will prevail. The Fed stuck to its position that more data was needed before a further move on rates. Economic data remained positive, painting the picture of an economy that is still healthy and potentially resilient. Economists and other observers, however, began to tilt somewhat towards a scenario in which challenges begin to arise. As has been the case all year, developing a clear picture of what is going on is becoming increasingly difficult. Tariffs are the biggest wildcard, as the effective rate of tariffs moves drastically, seemingly from day to day, so calculating the impact becomes challenging. Positive data, such as the May non-farm payrolls beating expectations, brings with it a double-edged sword – good news now, but complicates the Fed’s decision to resume interest rate cuts. I don’t envy the Fed’s position as it tries to balance getting in front of the possibility of tariff-induced inflation, normalizing rates, and maybe even a slowing economy.
Let’s get into the data: · Inflation, as measured by CPI, hit a significant low. For the 12 months ended in April, CPI was 2.3%, the lowest since February 2021. The monthly number rose 0.2%. · Non-farm payrolls for May came in at 139,000. The U.S. Bureau of Labor Statistics reported that the labor market added slightly more than the 130,000 jobs that were expected, and the unemployment rate stayed at 4.2%. · Business Activity has slowed. The Institute for Supply Management’s (ISM) benchmark® fell below the 50-point demarcation line between growth and contraction. New orders also fell to the lowest point since December 2022, when inflation was raging. · GDP appears to be rebounding. The Atlanta Fed’s GDP Now estimate for Q2 was at 3.8% in early June. What Does the Data Add Up To? What will the Fed do? Pressure to cut rates is clear, and in recent days, the conversation over whether the Fed will be “too late” again, as they were in 2022 when inflation spiked and the Fed didn’t act, under the belief that the increase in prices would be transitory. With inflation finally near 2%, the fear now is that the economy will fall into the only thing possible worse than high inflation. Stagflation is when prices are rising but the economy is not growing. For the Fed, the risk is that acting too quickly to cut interest rates in an attempt to inoculate the economy against the economic pain caused by tariffs will just increase inflation, which will put pressure on consumers, who will respond by cutting demand. With 70+% of GDP fueled by consumers, that will result in a stagnant or shrinking economy. And around we go. The CME Group’s FedWatch tool is currently projecting that the first rate hike isn’t likely until September. Even if the economy does fall into stagflation, there is some hope that it will be short-lived. The decrease in consumer demand, coupled with a slowdown in business investment related to the initial impact of tariffs, could create a slump that will ultimately put pressure on wages and prices. The positive side of stagflation is that it does not exist naturally for very long. When demand drops, prices eventually drop too, unless there is an outside force keeping them high, like oil prices, supply chains, or tariffs.
Chart of the Month: Inflation Is Trending Down for Now
Source: Bureau of Economic Analysis Equity Markets in May · The S&P 500 was up 6.15% for the month · The Dow Jones Industrial Average gained 3.94% for the month · The S&P MidCap 400 rose 5.25% for the month · The S&P SmallCap 600 increased 5.07% for the month Source: S&P Global. All performance as of May 30, 2025. Ten of the eleven S&P 500 sectors had positive returns, with Information Technology out front for the second month in a row, up 10.79%, and Health Care in last place, down 5.72%. The Magnificent added significantly to May’s returns after struggling earlier in the year. Monthly intraday volatility, measured as the daily high/low, decreased to 1.09% in May from April’s 3.21%. Earnings season is nearly complete, with 488 issues having reported, and 377 of those (77.3%) beating estimates on earnings. Bond Markets in May The 10-year U.S. Treasury ended the month at a yield of 4.40%, up from 4.18% the prior month. The 30-year U.S. Treasury ended May at 4.92%, up from 4.69%. The Bloomberg U.S. Aggregate Bond Index returned -0.39%. The Bloomberg Municipal Bond Index returned -0.13%. There is some concern that while the Fed will lower rates on the short end of the curve, federal debt and deficit, and “bond vigilantes” will keep the long end higher. This could be problematic for home buyers and retirees. More careful planning may be required. The Sona Investor · Are your budgets in line with expectations? Do you have any big expenditures coming up? Is your emergency fund topped up? A reality check of where you are can help you keep spending under control as the lazy days of summer get underway. Vacation spending has a tendency to be difficult to keep in budget, so having a realistic picture of your spending so far can help you set good limits. · Rates are still high, so locking in a CD or individual bond can be a great idea. Even moving money into a higher-yielding savings account can add significantly to your compound savings rate, keeping in mind that those high rates could disappear overnight when/if the Fed were to cut rates. The key is to “lock” in that high rate with an investment that you can hold to maturity.
· A difficult first quarter has turned around for now, but the losses may present an opportunity. If you usually wait until year-end for tax-loss harvesting or Roth conversions, you may want to think about doing it now to capture some benefit from the downturn. And to all fathers out there, enjoy your day!
If you don’t have a financial plan and would like to get one, schedule a Discovery Meeting:
To health and wealth! Mark Struthers, CFA, CFP®, CRC®, RMA® For current clients looking for a meeting:
This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but it is not guaranteed. |
