Monthly Market Recap

May 2025 - Imperfect Independence

A brief review of Fed Independence

KEY OBSERVATIONS

Markets Warm with the Weather - May brought a more constructive tone as trade tensions eased, lifting sentiment and encouraging a rebound in risk assets.
Fixed Income Buyers Remain Cold - While equities priced in potential fiscal stimulus, bond markets focused on long-term deficit risks, pushing yields higher across most of the curve.
Fed Independence Under the Spotlight - The Fed has held rates steady this year while calls from the Executive Branch grow louder to ease policy. Investors wonder yet again how independent the Fed truly remains.
Fed Structure Limits Political Control - Fed governors serve staggered 14-year terms and require Senate confirmation, but average tenure is only about seven years. While this structure gives presidents some influence, it falls short of control. This is especially true given that the full voting Federal Open Market Committee (FOMC) includes five regional presidents unaffiliated with the Executive Branch.
Imperfect Independence: - Despite renewed debate around Fed leadership and independence, there is no current evidence to suggest investors should shift positioning. The Fed remains an imperfect yet vital anchor for monetary stability.

Trade policy shockwaves are just beginning to reverberate

KEY OBSERVATIONS

Tariff Escalation Raises Recession Risk – U.S. tariffs, despite a temporary pause, have intensified global trade tensions. Without policy offsets, the economic drag increases the likelihood of recession. Markets briefly rallied on tariff delays but remain vulnerable to policy uncertainty.
Economic Placebo: The Bump then Fade – Tariffs could spark a short-term boost as consumers front-load purchases with the expectation of higher future prices. However, as higher costs hit profits and confidence, businesses and consumers may pull back.
Core Market Drivers Still Matter Most – Tariffs have dominated headlines, but they do not dictate the full story. Fundamentals like earnings growth, valuations and bond yields remain key drivers of long-term returns. Should growth falter, the Fed may pivot. And if tariff revenue is redirected into a “big, beautiful bill,” fiscal policy could become more supportive. Tariffs and the shifts in U.S. policy are clearly relevant, but they are not all-encompassing.

Investors rotate toward certainty as President Trump seeks to reshape the economy

KEY OBSERVATIONS

U.S. Equity Selloff – The S&P 500 fell -5.6% in March and -4.3% for the quarter, its worst since 2022, as stretched valuations and concentrated leadership fueled volatility.
Mag Drag – Despite 61% of securities posting returns better than the index, AI concerns and a selloff in high-valuation stocks pulled down the market. Six of the “Magnificent 7” fell between -11% to -36%, underperforming the S&P 500.
Global Rotation to Stability – Investors shifted away from U.S. equities, favoring Europe and China. MSCI EAFE outperformed the S&P 500 by 11% for the quarter, its strongest lead since Q2 2002, while China gained 15% on stronger manufacturing data and renewed policy efforts.
Growth Scare – The Federal Reserve is expected to hold rates steady, while fiscal policy tightens. Tepid consumer spending and declining confidence add to economic growth concerns.

High valuations come with high expectations. U.S. equity markets step back on growth concerns.

KEY OBSERVATIONS

Growth Scare Hits Risk Assets – Weaker economic data, a patient Fed and shifting policy dynamics fueled slowdown fears triggering a broad selloff of U.S. equities, with defensive sectors outperforming.
Growth Puts Spotlight on Valuations – High-valuation stocks fell more than peers, while value and defensive sectors led. Consumer staples outperformed consumer discretionary by 11%, while Treasuries rallied amid shifting markets sentiment.
International Extends its Lead – The MSCI EAFE Index, a proxy for non-U.S. developed equity exposure, took another step forward and added to its 2025 lead over the S&P 500, led by EU financial and defense spending along with a cooling of U.S. high valuation stocks.

January marks political and market shifts in leadership

KEY OBSERVATIONS

Markets Adapt to Policy Shifts – President Trump’s executive orders kept investors on edge, but his position on tariffs provided a tailwind for international markets.
NVIDIA’s Wake-Up Call – A 17% drop in NVIDIA shares, triggered by AI competition from China, highlights the risks of market concentration and stocks priced for perfection.
The Fed Holds Steady – With solid GDP growth and low unemployment, the Fed left rates unchanged, signaling caution rather than a rush to ease policy.
Tariffs are an Inflation Wild Card – While tariffs could push prices higher, history also shows they are just one piece of a larger economic puzzle. For more on this matter, please view our latest post.