May 2025 Market Commentary

May 14, 2025

• President Trump announces “Liberation Day” tariffs.
• President Trump pauses most “Liberation Day” tariffs for 90 days.
• Unusual fixed income market volatility and decline in US Dollar suggest investors may be losing
confidence in perceived safety of US safe-haven assets.
• Returns: S&P 500 -0.8%. Bloomberg US Aggregate Bond index 0.4%

Roller coaster aficionados enjoy the sudden drops, steep climbs, and many gyrations that make the rides so exhilarating. Investors by and large are a more staid group, generally eschewing excitement for calm and certainty. Both of those attributes were largely absent in April as trade policy and tariff announcements took investors on the market equivalent of a roller coaster ride. And yet, remarkably, for all the ups and downs and twists and turns experienced, like a roller coaster, the market effectively ended back where it started.

At the start of February, President Trump announced various tariffs on the country’s three largest trading partners- Mexico, Canada, and China- before quickly reversing course and suspending most of them for 30 days. In similar fashion, at the start of March, Trump once again announced, and then quickly suspended until April, tariffs on a number of countries. With the arrival of April, markets were once again braced for new tariff announcements. However, following February and March, the markets were also generally discounting the potential impact of any tariff announcement(s). Thus, markets were caught off guard by the scope and severity of Trump’s tariff announcements on April 2. Dubbed “Liberation Day”, Trump unveiled a 10% baseline tariff on all imports entering the US, regardless of the country of origin, as well as additional “reciprocal” tariffs on nearly 90 countries, which in the case of China, exceeded 50%.

Market reaction was swift as investors quickly extrapolated the potential economic impact of the tariffs. Over the ensuing four days, the S&P 500 fell 12%, the sharpest decline since the depths of COVID, shedding ~$5.8T in value and leaving the index down 19% from its record high set in mid-February. Exacerbating the decline was a swift and aggressive tit-for-tat exchange between the US and China in which the two countries announced multiple retaliatory and counter-retaliatory tariffs ending with a 145% tariff on Chinese goods entering the US, and a 125% tariff on US goods entering China.

Accompanying the equity market selloff was unusual and pronounced bond market volatility along with a notable decline in the US dollar. Those two factors and fear of greater financial market disruption seemingly convinced Trump to announce a 90 day pause on nearly all the reciprocal tariffs announced a week earlier. Exempt from the pause was the 10% baseline tariff as well as the 145% tariff on Chinese goods. Following the stomach-dropping decline precipitated by the April 2 announcement, the pause led to a sharp rally with the S&P 500 enjoying its best day since 2008, and third largest daily gain on record. Over the remainder of the month, markets continued to gyrate as Trump publicly berated Fed Chair Powell and mused about his removal, and economic data became more muddied, reflecting both the uncertainty created by the multitude of tariff announcements as well as the initial economic impacts thereof.

Towards month end, sentiment surrounding trade policy and tariffs improved as both Trump and Treasury Secretary Scott Bessent indicated the current level of tariffs on Chinese goods was not “sustainable” and that the tariffs would likely come down significantly. Those comments, as well as the absence of new tariff announcements, gave investors renewed hope that current tariffs might prove to be temporary with limited economic impact.

Despite concerns about the impact of tariffs, to date hard economic data has remained quite resilient. Nonfarm payrolls added 177K new jobs in April, nearly 40K more than expected, and better than the 2024 monthly average of 168K. Inflation, which economists, investors, and consumers alike are concerned will rise in the face of higher tariffs, slowed in March (reported in April). Headline consumer inflation (CPI) actually fell 0.1% for the month and slowed on a year-over-year basis from 2.8% in February to 2.4% in March. That tied September 2024 for the slowest pace of growth since February 2021. Excluding more volatile food and energy prices, core CPI rose just 0.1% for the month and 2.8% from a year ago, the first sub-3.0% reading and slowest pace since March 2021. Corroborating the CPI data, the Fed’s preferred measure of inflation, core personal consumption expenditures (PCE), slowed on an annual basis to 2.6%, matching June 2024 for the lowest level since March 2021. While encouraging, none of those inflation measures captured the impacts of President Trump’s April 2 tariffs, leaving economists, investors, and even the Fed, to wait a little longer until April inflation data is available, to glean the effects.

One economic data point that reflected the heightened uncertainty created by President Trump’s trade policies and proposals during his first two months in office was GDP, which shrank 0.3% during the first quarter. The decline was attributable to a 41% surge in imports, the largest since 3Q20, as businesses rushed to build inventories ahead of Trump’s April 2 tariff announcement. Somewhat overlooked in the headlines, however, was the strength in consumer and business spending, excluding inventories, which grew 3.0%, up from 2.9% in 4Q24. Overall, the report’s details pointed to continued underlying economic strength. The question now is the extent to which that strength might be compromised in the future by tariffs.

For all the ups and down, and intervening gyrations, markets ended the roller coaster ride that was April largely unchanged with large caps (S&P 500) declining just 0.8%. Small caps (Russell 2000), which tend to be more sensitive to economic expectations than their large cap brethren, fell 2.4%. International markets, less impacted by tariff concerns, enjoyed positive returns. Developed markets (MSCI EAFE) gained 4.2%, while emerging markets (MSCI EM) rose a more modest 1.0%.

Like equities, fixed income markets experienced their own roller coaster ride in April, particularly at the long end of the yield curve. However, unlike domestic equities, Treasuries eked out a small gain, helping propel the Bloomberg US Aggregate Bond index, the broadest measure of the US bond market, to a 0.4% gain for the month. The catalyst for the wild swings was President Trump’s April 2 tariff announcement, which caught fixed income investors as much off guard as it did equity investors. In the immediate aftermath of the announcement, investors rushed into Treasuries in a risk-off trade, pushing the 10-Year yield below 4% for the first time since early October.

Soon thereafter, Treasuries experienced a violent swing in the other direction, with yields surging upward as investors considered the possible inflationary impact and hit to economic growth that immediate implementation of the tariffs would bring. The surge in yields was notable as it ran counter to typical market behavior where yields often fall during times of market turmoil. However, in this case, the selling of Treasuries (and thus the rise in yields), at the same time equity markets were plunging, suggested investors were questioning the long-held assertion that Treasuries are the penultimate safe haven asset.

On April 7, two days before President Trump suspended nearly all reciprocal tariffs, the 10-Year Treasury yield experienced its largest single-day increase in history, rising ~0.20%. At the same time, the 30-Year Treasury was in the midst of its largest one-week increase since 1987, while the US dollar also weakened. The growing pressure on the Treasury and US dollar funding markets led Boston Fed President Susan Collins to acknowledge she and other officials were monitoring events closely and that the Fed would “absolutely be prepared” to step in and help stabilize markets if necessary. That ultimately wasn’t necessary as President Trump acquiesced and suspended tariffs.

The delay led to an uneven rally in Treasuries throughout the rest of the month as investors acknowledged that a greater reliance on tariff income will lead to at least a temporary reduction in growth and employment, thereby forcing the Fed to pursue additional rate cuts. The market’s projection for additional rate cuts, to counteract slower growth and employment, pulled yields lower to end the month. Like equity markets, despite the ups and downs, the 10-year Treasury yield finished April approximately unchanged from the day prior to the “Liberation Day” announcement, while the 2-year Treasury yield finished at lows last seen in September 2024.

The municipal market saw a similar pattern to the Treasury market, with an initial drop in yields on the tariff announcement, a rise in yields on the potential consequences of that announcement, and then a slow recovery as the tariffs were delayed and trade negotiations with various countries began. Though the pattern was similar, municipal bonds didn’t fully recover by month’s end. Municipal bonds faced additional unique headwinds over the month, as tax time typically leads to larger redemptions with investors selling bonds to pay their taxes. In addition, municipal investors face concerns regarding Federal budget cuts and the potential state and local impacts. Beyond that, there remain questions regarding the upcoming tax reform bill, and how it may or may not impact the tax-exempt status of municipal bonds. The unknowns kept municipal yields elevated to end April, despite an aggressive rally to end the month.

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