Monthly Market Insights - May 2025
Greetings Team,
Debt, Downgrades, and Double-Digit Gains: Why Markets Defied the Doomsters in May
May delivered a masterclass in market contradictions: Stocks soared while bond markets screamed recession. The Nasdaq ripped higher by 7.9% even as Moody’s stripped the U.S. of its last pristine credit rating. Treasury yields blasted past 5%, yet homebuilders rallied.
For investors, it was a reminder that walls of worry are meant to be climbed. Let’s dissect the chaos.
Markets in Review: The Relief Rally
Stocks posted their strongest monthly performance of the year, snapping a two-month slide with a broad rally. Growth stocks surged, led by large-cap tech, while rate-sensitive sectors, such as housing and financials, also rallied. On a year-to-date basis, the three major indices are flat:
📈 S&P 500: 5,911.69 (+5.49% MoM | +0.74% YTD)
📉 NASDAQ: 19,113.77 (+7.92% MoM | -0.87% YTD)
📉 DOW: 42,270.07 (+3.72% MoM | -0.29% YTD)
Markets breathed a sigh of relief after President Trump announced a 90-day tariff truce with China, reducing duties from 145% to 30%. He also delayed a 50% blanket tariff on EU goods after a phone call with EU Commission President Ursula von der Leyen.
Trump also threatened Apple (Nasdaq: AAPL) with a 25% tariff on imports unless the tech titan brings more iPhone manufacturing stateside. While this specific threat was quickly walked back, it reflects the current administration’s laser focus on reshoring production and manufacturing.
Overall, easing geopolitical tension, combined with strong Q1 earnings and still-resilient consumer data, sparked a sharp reversal in the markets. But beneath the surface, the bond market is telling a different story.
The Big Story: Moody’s Downgrades US Credit
On May 16, Moody’s cut its U.S. sovereign credit rating from Aaa to Aa1, citing the $36.2 trillion national debt, ballooning interest costs, and a lack of federal focus on balancing the budget. This downgrade means the U.S. has officially lost its top-tier credit rating across all three of its major agencies (S&P dropped it in 2011, and Fitch in 2023).
Moody’s noted that rising deficits—combined with looming tax cuts and continued fiscal expansion—leave the government with little room to maneuver in the event of a recession or crisis. Simply put, the American safety cushion is deflating, and the markets are noticing.
A Big, Beautiful Bill...With A Big, Ugly Deficit?
Moody’s downgrade wasn’t just about past spending—it was also a preemptive reaction to Trump’s “big, beautiful bill,” a sweeping $3.1 trillion package passed by the House in May. While the bill includes popular measures like extending tax cuts, increasing defense and border spending, and selective regulatory rollbacks, critics are calling it a “debt bomb” in the making.
Republican senators voiced concern about the bill’s impact on long-term solvency, with Sen. Rand Paul noting, “These will be GOP deficits.” Sen. Ron Johnson warned, “The bond markets… realize we’re becoming less and less creditworthy.”
The bill passed largely on party lines and now heads to the Senate, where some fiscal conservatives are pushing for deeper cuts. But in the meantime, the bond market is already reacting.
By The Numbers: Yield Curve Sends Message
In May, long-term Treasury yields spiked, pushing the 30-year yield above 5.15% and the 10-year yield back over 4.6%. Mortgage rates followed, jumping back above 7%. These yield spikes came despite the Fed holding steady and doubling down on two rate cuts later this year.
What’s happening? This is the bond market’s way of saying: “We’re not buying it.”
A steepening yield curve (where long-term rates rise faster than short-term ones) typically signals concern about future inflation and the debt supply. The poor reception of a 20-year bond auction in mid-May, where demand fell to its lowest level since February, underscored investor anxieties.
David Rubinstein, co-founder of The Carlyle Group, commented that the U.S. bond market is beginning to question whether the nation’s current level of debt is sustainable. The sharp repricing of longer-dated debt suggests the market may be trying to force policymakers to show some much-needed fiscal discipline.
Economic Snapshot: Labor Market & Inflation
Despite all these fiscal fireworks, the real economy remains intact:
- The unemployment rate was unchanged at 4.2 percent in April and has remained in a narrow range of 4.0 percent to 4.2 percent since May 2024.
- Companies are reluctant to lay off workers, though they also appear hesitant to hire.
- The median duration of unemployment rose to 10.4 weeks in April, up from 9.8 in March, but still considered relatively short compared to historical averages.
Inflation, however, may be staging a comeback.
According to S&P Global’s flash PMI data, input prices surged to an 18-year high, and prices charged by businesses rose to their highest level since August 2022.
Re-accelerating inflation, fueled in part by higher costs due to tariffs, could complicate the Fed’s path forward and lead to fewer or later rate cuts than markets are currently pricing in.
Watch the Hard Data, Not the Headlines
May reminded us that markets can rise even when headlines look grim. Investors who held through April’s volatility were rewarded handsomely, and those who panicked likely missed out.
Here’s the thing: it’s easy to get caught up in the headlines. But what matters most is hard data. And right now, the data still points to a U.S. economy that’s just cooling down—very much in line with historical norms. “Sell in May and go away” is an old Wall Street adage precisely because the summer months tend to be slower for the markets.
The bottom line is that long-term investors should take heart in May’s market rebound. Corrections are normal. Volatility is normal. But discipline is what delivers results. Even as credit ratings fall and politics heat up, a focus on fundamentals and long-term planning is still your best defense.
“The market is a device for transferring money from the impatient to the patient.”* — Buffett’s wisdom felt especially apt this month.
As always, onward, and upward.
Steven and Daniel
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STEVEN W. SCHMITT, MBA, CFP®, CPM®, CRPS®, ADPA®
Managing Director, Private Wealth Advisor
CA Insurance # 0G61253
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