Market Commentary - May 2025

May 2025

April Recap: Volatility, Recovery, and the Path Ahead

April 2025 will be remembered as one of the most volatile months in market history, testing the resolve of investors as extreme uncertainty gripped global financial markets. The turbulence was largely sparked by President Trump’s surprise tariff announcement on April 2, which led to sharp market swings, reflecting heightened recession fears and geopolitical tensions.

See Breaking News Below

A Month of Sharp Moves
On April 2, President Trump’s tariff announcement triggered a sharp sell-off, driving recession fears as the proposed tariff levels significantly exceeded worst-case expectations. By April 8, the S&P 500 had plunged 18.9% from its 2025 high, with the tech-heavy Nasdaq and small-cap Russell 2000 both falling over 20%, pushing them firmly into bear market territory.

However, a dramatic turnaround began shortly after. Following an overnight bond market revolt on April 8 that sent Treasury yields sharply higher amid inflation concerns, Treasury Secretary Bessent reportedly convinced the administration to consider a 90-day pause on reciprocal tariffs, excluding China. This intervention helped ignite a powerful rally, allowing the S&P 500 to close April down just 0.8%, while the tech-heavy Nasdaq managed a modest 0.9% gain. The Dow, Russell 2000, and mid-cap S&P 400 trimmed their April losses to just 2-3%, though year-to-date (YTD) losses remain steeper.

Whipsaw Market Conditions
April served as a chilling reminder of the risks of market timing. The month witnessed one of the fastest slides into a bear market, followed by the S&P 500’s strongest single-day rally since March 2020, with a 9.5% surge on April 9. The Dow surged nearly 3,000 points, while Nasdaq posted its second-largest one-day gain in history at 12.2%. Investors navigating these whipsaw conditions were challenged to stay disciplined as rapid sentiment shifts tested portfolios.

Global Diversification Pays Off
While U.S. markets struggled, international diversification offered some relief. The MSCI EAFE index, a benchmark for developed overseas markets, posted a 4.2% gain in April, finishing up 10.6% YTD. Emerging markets also fared better, with the MSCI Emerging Markets index gaining 1% for the month, bringing its YTD return to 3.5%. The weakening U.S. dollar, down 8.3% YTD, further boosted these international returns for U.S. investors.

Bond Markets Hold the Line
Despite a brief surge in yields during the bond market revolt, fixed income assets provided some stability amid the equity turmoil. The Bloomberg Aggregate Bond Index edged up 0.4% in April, bringing its YTD gain to 3.2%. Meanwhile, the benchmark 10-year Treasury yield ended the month at 4.17%, after spiking to 4.50% on April 8. This underscores the importance of maintaining balanced, diversified portfolios to weather market volatility.

Economic Outlook and Fed Policy
As recession expectations surged in April, so did forecasts for Federal Reserve rate cuts. Market expectations for Fed easing rose from two to four cuts by year-end, with the earliest anticipated at the June FOMC meeting. This shift comes as U.S. GDP contracted by 0.3% annualized in the first quarter, driven by a sharply widening trade deficit ahead of the tariffs.

May Update: Recovery, Caution, and Breaking News
As of early May, market recovery momentum has continued, trimming tariff-driven losses, while global trade tensions and economic uncertainty remain elevated and caution is warranted. Meanwhile, the labor market remains stable with unemployment at 4.2%, despite the Q1 GDP contraction.

Breaking News (5/12/25): Over Mother’s Day weekend, Treasury Secretary Bessent met with China trade representatives in Geneva and mutually agreed to temporarily lower reciprocal tariffs from unsustainable levels, while further details are worked out. The de-escalation was welcomed news and markets surged across the board today on the news, led by tech-heavy Nasdaq +4.8%, small-cap Russell 2000 +4.4%, mid-cap S&P 400 4.2%, and the benchmark S&P 500 +3.4%, while the Dow jumped 1191 points, or 2.9%.

Interest rates rose on the news, as recession risks waned along with Fed rate cut expectations. The market now anticipates only two rate cuts in 2025, starting in September, pushed from July, signaling a more hawkish stance as economic risks recede. Expectations were for 3-4 just last week. The 10-year Treasury Note yield closed at 4.45%.

Managing Market Noise: Why Headline News Doesn’t Always Reflect Your Portfolio

In today’s fast-paced, 24-hour news cycle, market headlines can be a major source of anxiety for investors. However, as the recent market volatility has shown, not all headlines translate directly to the performance of a diversified portfolio.

As highlighted in our recent analysis, global diversification and bond market stability have provided important buffers against market turbulence. While diversification can’t eliminate the risk of loss or guarantee a gain, it remains one of the most effective strategies for managing volatility, while distributing risk and return opportunity.

For example, even at the height of the market’s April 2 tariff declines, well-diversified portfolios that included international equities and bond exposure experienced significantly more moderate losses than concentrated U.S. stock positions. By the April month-end, more conservative balanced portfolios were positive YTD. Following the May 12 market rally, those YTD gains have extended further to include Moderate, Moderate-Aggressive, and Aggressive.

This demonstrates the enduring value of maintaining a broad investment approach, which is at the core of our Managed Accounts strategy and recommended Asset Allocation Models.

Outlook: Patience and Discipline
We continue to emphasize the value of diversification and a long-term perspective, particularly as uncertainty and volatility remain prominent features of the current investment landscape.

Whether we are experiencing periods of optimism, uncertainty, and volatility, it is important investors:

• Remain well-diversified
• Maintain discipline and patience
• Focus on the long-term
• Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.