— Aristotle
“Patience is bitter, but its fruit is sweet.”
May was a positive month for equities—particularly US equities—as markets continued to recover from the sell-off and volatility that accompanied the ‘Liberation Day’ tariff announcements at the end of March. The moderation and delay of the ‘reciprocal’ tariffs, as well as the de-escalation of a budding trade war between the US and China, have since provided a tailwind for stocks; and some stronger-than-expected economic data and corporate earnings releases (notably those of Meta and Microsoft) have reinforced the bullish tone. By the 2nd of May, the S&P 500 Index had already climbed back above its pre-Liberation Day levels—and it has made further big gains since; other indexes have likewise ripped higher over the month. To be sure, it has not all been smooth sailing since the Trump administration retreated from its most aggressive tariff proposals—and there was a pullback in equities over the last week. But all major equity indices finished May firmly in the green.
“May was a positive month for equities—particularly US equities—as markets continued to recover from the sell-off and volatility that accompanied the ‘Liberation Day’ tariff announcements at the end of March.”
Sovereign bonds, meanwhile, saw more muted performance during the month. US debt sustainability concerns resurfaced after Moody’s downgraded Uncle Sam’s credit rating from Aaa (its highest rating, suggesting negligible credit risk) to Aa1 (suggesting very low credit risk) towards month-end; and this added to the upwards pressure on rates from rising inflation expectations, dwindling US recession bets, and the hawkish Fed comments that accompanied its decision not to cut the Fed Funds further, for now, in early May. Remarkably, by the end of the month, markets were pricing in fewer than two more Fed rate cuts before year-end (for the first time since February), and the 30Y US Treasury yield was hovering just shy of 5.0%—a level it breached a few days earlier after the House voted in favour of Trump’s tax slashing ‘big, beautiful bill’.
Moody’s decision to downgrade the US credit rating was an important symbolic move because Moody’s was the last of the major credit ratings agencies to give US sovereign paper its highest rating. But the decision can hardly have come as a surprise to investors. The US had been on Moody’s watchlist since November 2023 and neither the Biden nor Trump administrations showed much fiscal restraint in the intervening period. Everyone can see that the US deficit is absurdly wide: the borrower is a peacetime government presiding over a relatively fast-growing economy—even with policy rates at decadal highs; and, looking forward, if the tax breaks included in the ‘big, beautiful bill’ become law there’s little chance of the deficit closing soon. The downgrade was therefore, if anything, overdue, in our view—and a spike in government bond yields on the news was not unexpected.
Returns were better elsewhere in fixed income in May because as rates rose, credit spreads tightened. Indeed, this meant that high yield bonds finished the month in strongly positive territory. Spreads have widened overall since Trump’s inauguration—and did so very abruptly in early April—but they remain tight by historical standards with a powerful bid for income still in place. We don’t anticipate a recession later in the year. But given the unpredictability of this administration we are cognisant that a recession cannot be ruled out entirely. This makes us cautious of credit as a whole going forward and underscores the need to be selective in what we do buy.
“Spreads have widened overall since Trump’s inauguration—and did so very abruptly in early April—but they remain tight by historical standards with a powerful bid for income still in place.”
The Trump administration claims that, since Liberation Day, countries have been falling over themselves to negotiate trade deals with the US and have shown much greater readiness to address historic US trade grievances as part of that process. Perhaps. But the number of simultaneous negotiations taking place—approximately 100, according to the administration—as well as the tight timescales over which these talks are expected to conclude means that few, if any, deals are likely to be comprehensive or final. The US has struck a deal with the UK, for example, but this failed to tackle the thorniest issues (for example, those that relate to agriculture) in what is already one of America’s most well-balanced trade relationships (according to US officials themselves). A major trade deal with the EU or China will be harder to reach—and we should therefore not be surprised if there are further, disruptive tweets on tariffs incoming. Indeed, the 50% tariff with which Trump has threatened the EU may yet be implemented when the extended July 9th deadline comes around—and Treasury Secretary Bessent has suggested that talks with China are currently ‘a bit stalled’ (not something an impatient Trump will want to hear). Investors may choose to reassure themselves that Trump Always Chickens Out (the so-called ‘TACO’ trade) on tariffs. But we are still very early in this Presidency.
To be sure, the 28th of May decision of the Court of International Trade that the President does not have the authority to use the International Emergency Economic Powers Act to impose many of the sweeping tariffs announced on Liberation Day is a significant development—and a spanner in the works for Team Trump. The ruling would have blocked the 10% baseline tariff applied to all US trade partners, the 25% tariffs on Canadian and Mexican products not subject to the US-Mexico-Canada Agreement (‘USMCA’), the 20% tariff levied on China to incentivise action on fentanyl, and the paused ‘reciprocal tariffs’ too. But the Court of Appeal has reinstated the tariffs while it considers the administration’s request for a long-term stay on the trade court’s tariff suspension—and a Trump-friendly Supreme Court may yet side with the administration if the case makes it that far.
Moreover, even if the trade court’s decision holds, Trump has multiple avenues to keep tariffs in play—including Section 232 (used already for steel, aluminium, and autos tariffs, and invoked on the last day of May to justify doubling steel and aluminium tariffs from 25% to 50%) and Section 122 (which permits 15% tariffs for 150 days). Some of these legal mechanisms will take time to activate, and the uncertainty caused by the trade court’s decision may lessen the urgency for other countries to strike deals with the US in the short-term. But markets should not expect the courts to bail them out. The administration is set on using tariffs as a key lever in its trade strategy—and where there’s a will, very often there’s a way.
“The administration is set on using tariffs as a key lever in its trade strategy—and where there’s a will, very often there’s a way.”
Interestingly, despite US rates having risen in May, the dollar has not recovered the ground it lost after Liberation Day. Investors are used to seeing money flow into currencies that command higher rates on savings—particularly when rates and expectations for future rates change, as they did during the month. Moreover, the dollar should ‘normally’ benefit from market volatility and uncertainty, being a so-called safe haven—and, while there has been a lot of volatility and uncertainty around, the dollar has sold-off instead! Clearly, the White House is to blame: investors have been spooked by the violence of US trade policy gyrations and marginal buyers continue to favour non-US assets (such as gold, for example, which closed the month at c.3350). To be sure, if a slew of trade deals are now struck then the dollar does seem well-positioned to rise. But confidence in the administration’s economic management is low and it will take time to recover. A rather tentative rebound for USD is a distinct possibility, even if macro fundamentals favour the greenback medium-term.
“If a slew of trade deals are now struck then the dollar does seem well-positioned to rise. But confidence in the administration’s economic management is low and it will take time to recover.”
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch
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