Spring Surge
While the talk of aggressive trade policies and international pressures has been ongoing, May allowed for a sweet reprieve inequity markets. Equities spent the month continuing to recover from early Aprillows. The S&P 500 Index and the NASDAQ Index returned up +5.63% and +8.01% respectfully for the month of May. The wider spread between the returns ofthose two similar indices is generally attributed to the sector drag on the S&P because NASDAQ has a heavier tech weighting.1, 2 Moreover, NASDAQ has a heavier consumer discretionary weighting and smaller weightings in consumer staples and financials relative to the S&P 500.1, 2 That difference in sector weightings has given way to more resilience to trade tensions and tariff policies. International equities followed suit to domestics, returning +5.24% and +4.38% as tracked by the MSCI ACWI Ex US index and the MSCI Emerging Markets index respectively. While the two indices ended the month in generally the same position, emerging markets experienced more volatility on the way there.
Debt markets, contrary to equities, struggled to produce strong returns and ended the month -0.39% as tracked by the Bloomberg Global Aggregate Unhedged Total Return Index. Initially debt was a refuge to the turmoil that investors were experiencing in equity markets but, as sentiment shifted and as equities recovered, debt fell. This pattern is notable because traditionally equities and bonds performed inversely to one another, but during the last 15 years the two have exhibited significant positive correlation.3 As a result, investors experienced a year like 2022 where both were down and there was no place to seek positive returns. All said, this shift from positive correlation to negative is generally a good sign for diversification benefits despite the lagged returns of bonds this month.
The Fed met in early May and decided to hold interest ratesfor the third consecutive time.4 Credit spreads have widened sincethe end of January, with treasury yields going down while BB-rated bond (i.e. junk) yields held steady, resulting in a higher credit premium. The yield curve has been inverted since July 2022, and this inversion began to reverse and movetowards a traditional upward sloping curve in the early part of this year. The inversion was driven by high short-term rates more so than low long-term rates, so the reversal has been primarily driven by the Fed’s decisions in late 2024to place three consecutive rate cuts resulting in falling short-term rates with little change to long-term rates. The next meeting is scheduled for mid-June andBloomberg's World Interest Rate Probability function doesn’t have investorspricing in any changes to policy until late October, where the expectation is another cut. With few cuts priced in, questions about the yield curvemaintaining its reversal begin to arise.
As economic expectations continue to evolve, spreads continue to move, and trade policies begin to take effect, it’s hard to suggest what could happen next in any market. Fortunately, it’s clear that globally diversified portfolios can mitigate risk, seen presently as non-US markets have outperformed domestic markets Year-to-Date and have provided positive returnsto counterbalance the US equities during April and the lagging bond market. Allsaid, the obvious caveat is it’s impossible to predict future market returns based on policy that may or may not be implemented. Even if we know a policy will be implemented—tariffs, for instance—it’s challenging to pin down exactly what the impact will be on various market segments.
Hazel Allen
Portfolio Management Analyst
1https://www.spglobal.com/spdji/en/indices/equity/sp-500/?currency=USD&returntype=P-#overview
Updated daily; Accessed June 1, 2025
2https://indexes.nasdaqomx.com/index/Breakdown/COMP
Updated daily; Accessed June 1, 2025
3https://www.ssga.com/us/en/institutional/insights/the-global-trend-of-positive-stock-bond-correlation
Published December 23, 2024; Accessed June 1, 2025
4https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
Published annually; Accessed June 1,2025
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market, and itis highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The Bloomberg Global Aggregate Unhedged Total Return Index is a benchmark that measures the value of global investment grade debt. It includes fixed-rate bonds from developed and emerging markets and is reported in US dollars.
The MSCI All Country World Index(ACWI) captures large and mid-cap representation across Developed Markets (DM)and Emerging Markets(EM) countries. The index covers approximately 85% of the global investable equity opportunity set.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is afloat-adjusted market capitalization index.
Bloomberg's World Interest Rate Probability (WIRP) function is a chart that shows the probability of different interest rates for the US benchmark rate. The chart is based on interest rate caps and floors, as well as options on Treasury futures.
A bond with a BB rating is considered as non-investment grade, which is commonly referred toas high-yield or junk bond. This means that the issuer of the bond has an elevated risk of defaulting on their debt obligations and therefore the bond carries a higher risk, yet also pays higher yields.
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