May Market Commentary

May Market Commentary

After a sluggish March and April, May delivered a strong rebound for equities, with the S&P 500 (1) and NASDAQ (1) posting their strongest gains since 2023, up 6.15% and 9.56%, respectively,  despite ongoing concerns about trade tensions and economic growth. The Dow (1) also climbed 3.94%, while nine of the eleven market sectors ended the month in positive territory, led by technology, communication services, and consumer discretionary. Markets rallied early on strong corporate earnings and job data but remained sensitive to shifting trade dynamics between the U.S. and China. Meanwhile, GDP growth slowed sharply in Q1, and consumer spending weakened, reflecting broader concerns about economic momentum.

“If something cannot go on forever, it will stop.” – Herb Stein

That timeless observation feels especially relevant today. As we contemplate the 119^th Congress’ deliberations on the One Big Beautiful Bill Act and reflect on the trajectory of U.S. fiscal policy, we’re reminded that sustainability, or the lack thereof, is not a slogan, but simple arithmetic. And that math is starting to catch up with policymakers and markets alike.

The United States is currently running a federal deficit of nearly $1.9 trillion, or approximately 6.5% of its GDP, a historically high figure considering that unemployment is low and the economy is not in a recession. This points to a structural imbalance rather than a cyclical one. As illustrated in the accompanying graph, which shows federal deficit spending trends from 2001 to 2024, the growth in deficit levels has accelerated in recent years. Meanwhile, the national debt has surpassed $35 trillion, now exceeding the size of the entire U.S. economy. Interest payments alone are projected to reach $952 billion this year, making them one of the largest line items in the federal budget.

In May, Moody’s became the third and final major credit rating agency to downgrade the U.S. government’s credit rating. Their concern? A bipartisan failure to address persistent deficits and rising interest costs. The bond market reacted strongly. Yields on long-term inflation-protected bonds jumped to their highest level ever, unusual pricing patterns emerged that signaled market stress, and borrowing costs rose globally, including mortgages and government bonds. These are signs that markets are beginning to price in the risk of unsustainable government spending, not just interest rates or inflation.

In the Senate, negotiations over the “One Big Beautiful Bill” have grown increasingly contentious, as fiscal conservatives attempt to rein in new spending provisions and demand more serious deficit reduction measures. These self-described deficit hawks argue that the bill’s tax cuts and spending extensions risk further eroding fiscal discipline at a time when borrowing costs are surging. This legislative brinkmanship is mirrored in markets, where uncertainty is no longer confined to Capitol Hill as bond market participants, sometimes referred to as “bond vigilantes”, are beginning to exert pressure of their own. By demanding higher yields to compensate for rising fiscal risk, they signal that if Congress won’t impose discipline, the market might. This dynamic, where investor confidence, not just legislative consensus, drives policy change, has historically forced governments to confront unsustainable trends. Whether the current standoff produces meaningful reform or just another patchwork fix remains to be seen.

The markets remain highly reactive to policy signals. The latest episode of on-again, off-again policymaking came in the form of tariff threats against the EU and Apple, which briefly erased the S&P 500’s modest year-to-date gains. Yet just days later, a pause in political noise sent investors fleeing back to Treasuries. This kind of volatility underscores that we’re in a new era where policy volatility begets market volatility.

Beneath the surface, inflation has cooled, though not to the Fed’s 2% target. April’s CPI showed just a 0.2% monthly gain, with annual inflation easing to 2.3%, its lowest level since early 2021. Producer prices fell by 0.5%, their steepest drop in over a decade. That may give the Federal Reserve more flexibility to adjust rates later this year, especially if the labor market and consumer spending continue to soften.

Looking ahead, we maintain a cautiously constructive outlook and continue to emphasize the importance of diversification, discipline, and preparation for volatility, especially as policy risks remain elevated. Policy uncertainty has undeniably contributed to hesitation in boardrooms and delayed capital expenditure decisions. However, both corporate leaders and financial markets are growing more accustomed to the Trump administration’s style of bold opening proposals followed by rapid softening, pauses, or reversals. In this environment, trying to invest based on every policy twist is often as futile as chasing one’s tail. The better course is to stay calm, stay diversified, and stay focused on the long game. We’ve weathered turbulence before, and we’ll get through this one.

Your May portfolio reports are available in your eMoney vault. If you’d like to revisit your financial plan or have questions about your portfolio, please don’t hesitate to call or schedule a meeting with us.

We also want to invite you to a special summer event. We’re hosting Amon! The Ultimate Texan on July 12^th at 3:00 p.m. & 7:00 p.m. and July 13^th at 7:00 p.m. at the Palace Arts Theater in Grapevine, with a private reception at Messina Hof Winery before the Saturday evening performance. Complimentary tickets are available for you and your guests, so feel free to invite family and friends. Please reach out to larissa@waterworthwa.com to reserve your seats.

Thank you for your continued trust in us. It’s a privilege to serve you.

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1. The Dow, NASDAQ, S&P 500, and Russell 2000 – are unmanaged groups of securities considered to be representative of the stock market in general