Is “Everything gonna be alright”?
Everything’s Gonna be Alright
– David Lee Murphy and Kenny Chesney (2018)

It would be naïve to think that one month of rallying US stocks would mean that markets are back on track and there is nothing to worry about. Remember that to have a recovery there needs to be a setback to bounce back from. And, recall that the cause of the setback and the recent recovery are the uncertainties about US trade policy and tariffs and their impact on the US and global economies.

As weeks passed since the announcement of tariffs and the subsequent pauses, a cautious optimism arose that the impacts will not be as severe as initially anticipated. Expectations are US companies and their global trading partners will figure things out in such a way that the US economy may bend but will not break. Unfortunately, for the optimistic to be further rewarded actual progress will need to be made. Or, markets could pivot to the negative again. Look to the US bond market for evidence of pessimism in the outlook ahead. It does not take much for bond investors to be skittish and they have been hit with modestly higher interest rates, an expanding US fiscal deficit, and another US debt downgrade by Moody’s.

Woven through this month’s song lyrics is an uncertainty about the reassurance that “everything’s gonna be alright”. It is almost as if a question mark should punctuate the message rather than an exclamation point. While some in the markets may be pushing the positive interpretation, many investors have questions about how this will all play out over the summer. In addition to tariffs, markets are paying attention to whether the “big beautiful bill” will pass Congress and at what cost to current and future economies. Also, let’s not forget the Fed which is still trying to chart a path forward as inflation has fallen but forecasts call for increases in many of the possible scenarios.

It would be great if everyone could have the feel good attitude inspired by the song’s lyrics:

“And nobody’s good worry ‘bout nothing
Don’t go hittin’ the panic button
It ain’t worth spilling your drink
Everything’s gonna be alright”

Maybe everything will be alright, but that is a big assumption given the questions and issues facing investors as summer begins. The typical good vibes of the summer months are likely to be tested by more uncertainty and changing moods of investors. The subtle skepticism embedded in the song’s lyrics is good advice to investors: Be mindful of being too optimistic, especially when everyone is telling you “everything’s gonna be alright”.

Here are observations on what occurred across the public markets during May:

Broad Market Performance¹

Domestic Equity²

• US stocks continued the “tariff pause rally” that started in April as investors expect less trade policy impacts on corporate earnings and consumer spending.
• Large and midcap growth indices, lead by many of the 2024 winners which bounced from March lows, were the best performing segments in May.

International and Global Equities³

• Non-US developed markets lagged US large caps but maintain sizeable outperformance on a YTD basis. German equities have outperformed the US by 30% this year.
• With tariffs paused or being re-negotiated, many developing markets bounced back and delivered competitive stock returns in May.

Fixed Income Markets⁴

• US fixed income markets were hit by rising interest rates as investors focused on fiscal spending, the level of US debt, and another US debt downgrade. Rates rose roughly 20bps across the yield curve.  High-yield bonds were the lone bright spot, benefitting from the equity market rally.

Specialty Markets⁵

• Commodity indices were mixed with gold hitting new highs, gas and oil prices moving higher, while some agricultural commodities fell on trade concerns. REITs moved higher in May.

Sectors⁶

• Driven by some of the Mag 7 names, the IT, Communication Services, and Consumer Discretionary sectors were the top performers in May. Health Care was the only negative sector for the month.

If you have questions or want to discuss how the shifts within equity markets across the globe could impact your plan or portfolio, please do not hesitate to reach out to your advisor—they are here to help.

1-6 All data supplied by Morningstar.

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