CIO's Market Watch – May 2025

In, out, in, out …. Shake it all about

I’m beginning to wonder just when all the news of trade tariffs will end and we can move onto another subject. However, I am coming to the conclusion that it may well not end, certainly not during the Trump Presidency and probably not for a long time after that, given the fundamental impact they are likely to have on economies, businesses and consumers. It feels a bit like Brexit, nine years after the referendum, we are still assessing and dealing with its ramifications.

It shouldn’t be surprising that tariffs are probably right at the top of the Google and ChatGPT most searched topic lists given the on, off imposition strategy that has been adopted by the President. It remains confusing and disruptive to most countries and industries around the world.

It is creating huge swings in business activity in the US as well. The chart below shows the month-on-month percentage change in goods imported into the US since 2019. As you can see, it is fairly irregular and the impact of COVID in 2020 is clear, but that is modest compared to the swings seen since just before the US election last autumn. There was a leap in imported goods as companies prepared for the tariffs and a collapse once they were introduced. Doing business with the US is now more difficult and more expensive.

US imports, month-on-month change, January 2019 to April 2025

Source: Bloomberg, US Census Bureau 31.01.2019 – 30.04.2025

Bond investors have been there for a while, now everyone is arriving

A country’s budget deficit occurs when its government spends more than its income, which is mostly derived from taxes. These deficits are normal and the gap is filled by governments borrowing through issuing bonds or debt (called gilts in the UK and Treasuries in the US). The problem is that these, already large deficits, were taken to a new level in the 2008-2009 global financial crisis and then turbo charged through COVID as governments had to support collapsing economies. Economic growth has not been strong enough to generate significantly higher tax revenues. These deficits have fiscal rules or ceilings that limit their size and we are now getting rather too close to those for comfort.

The immediate problem is that tax receipts are not rising as economic growth is weak. In the US the tariffs were supposed to raise tax revenue, enabling personal and business tax cuts to stimulate the economy, but that’s not happening. In the rest of the world the tariffs are having the opposite effect. Therefore, government spending may need to be cut in some areas when the need to spend on defence is rising, that is not a popular political move. It’s the same issue in the UK.

One answer is to raise the debt ceiling, but that is not a sustainable outcome. In the meantime, more debt needs to be raised to fund the deficits and investors are selling bonds in the expectation that governments are going to have to issue more. As they are sold, the price falls, which means the yield rises, as these are inversely correlated. The yield is, effectively, what the issuer has to pay in interest to the buyer of the bond.

Bond markets are complex, but to illustrate what this means, this is a chart of the yield of the US 30 year Treasury bond, meaning it is repaid in 30 years’ time. These long dated bonds can be sensitive to changing conditions. The yield (effectively the cost of issuing a new bond) has risen from less than 4% in September to virtually 5% today. Given the size of the debt, that is a big interest bill!

This is not a problem that is easily resolved.

US 30 year Treasury bond yield, 31.05.24 – 31.05.25

Source: Bloomberg 30.05.2025 – 31.05.2024. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

“Sell in May and go away”? Time will tell 

This is one of the more popular sayings amongst investors, it applies to equity markets and refers to May often being a good month, followed by weaker months for equity markets over the summer holiday period. May 2025 was one of the very best months of May for the S&P 500 Index (An index that tracks the share prices of the leading publicly traded companies in the US based on their size) in the US since 1990. This was mainly driven by hopes that trade tariffs would not be as bad as initially expected.

However, the much quoted, Magnificent 7 US giant technology companies that have driven equity markets for some time, but had a tougher time in the early part of this year, made a return to form, driving and making up a large amount of the recovery in the S&P 500 Index since the lows hit on 8 April, following the tariff announcement.

I’m not one to predict short term financial markets moves, but concerns around tariffs and the global economy and the maxim of selling in May could be prophetic. However, that might not play out and irrelevant of that, we should focus on the long term.