John Gorlow
| Jun 20, 2025
Some months, markets rise on strength. But at other times, they rise despite weakness. This is what happened last month, to the consternation of many investors. The S&P 500 climbed 6.3% in May, with U.S. stocks posting their strongest monthly gain since late 2023. Markets were led by a resurgence in large-cap technology stocks. Treasury yields also moved higher, reflecting both improved economic sentiment and the persistent overhang of fiscal instability. Bond markets absorbed a credit outlook downgrade from Moody’s, while inflation data gave the Fed some breathing room.
These gains occurred against a backdrop of rising global and domestic tensions, the news getting worse with each passing day. Why does the market seem so complacent? After a quick review of May market data, we’ll explore why markets don’t always reflect our mood, and offer tips on managing investments during times of volatility.
May Market Review
Equity Markets
U.S. equities roared back in May. Tech surged more than 10%, while every sector but health care joined the rally. Large-cap led small-cap stocks. Growth trounced value. Abroad, non-U.S. developed and emerging markets posted positive returns but lagged their U.S. counterparts. Emerging markets rose over 4%, while developed markets gained nearly 5%. Year to date, large-cap growth stocks continue to dominate, despite concerns over concentration. Small-cap and value indices, meanwhile, remain in negative territory.
Inflation and Fed Policy
Headline CPI cooled to 2.3% in April, its lowest level since early 2021. Core PCE, the Fed’s preferred inflation gauge, eased to 2.5%. The disinflation trend gives the Fed room to maneuver, though policymakers held rates steady in June.
The Fed’s tone has grown more cautious. Markets now expect two or three cuts—down from four—beginning no earlier than September. With inflation easing but political pressure rising, the Fed is balancing support for growth against control over inflation. For now, restraint remains the strategy, with normalization still in play.
Fixed Income
Treasury yields moved higher in May, with the 10-year note climbing to 4.41% and the 30-year reaching nearly 5%. The Bloomberg U.S. Aggregate Bond Index declined 0.7%, breaking a four-month winning streak. Corporate bonds outperformed Treasuries. Muni bonds advanced modestly, outperforming duration-matched government debt.
TIPS underperformed slightly but fared better than nominal Treasuries, as long-term inflation expectations rose. Mortgage-backed securities posted mixed results. The market absorbed Moody’s downgrade of the U.S. credit outlook, but the question remains, for how long?
America’s Sour Mood
One reason the market’s recent performance feels “off” is the generalized feeling that our nation is in a fragile place. Not everyone feels this way, of course, but the recent, rapid dismantling of the federal workforce by a team of 20-somethings led by Elon Musk stirred widespread unease which has now bled into other fears.
Nearly 70% of Americans rate the economy as poor or not good, and two-thirds believe the country is on the wrong track. Trust in government has cratered and patriotism has eroded, with just 30% of Americans saying it's very important to them, down from 70% just a generation ago. Abetted by a proliferation of deeply partisan podcasts and conspiracy theories, polarization has surged to unprecedented levels. The recent assassination of two elected American politicians and explicit threats against presidential candidates point to a deeply fractured American public, increasingly prone to violence.
Structural failures add to the story of American decline: soaring public debt, unequal opportunities and outcomes, frayed safety nets, and the threatened loss of public benefits including SNAP and Medicaid. Labor participation has decreased to just over 62%, lower than pre-pandemic levels. Non-college wages have stagnated. Many believe the Electoral College is broken and representative democracy is a joke. Meanwhile, some are intent on making it harder for large swaths of citizens to vote. Little wonder that Americans are feeling down, if not downright depressed.
It is odd, then, to observe the markets blithely marching on as they did in May. And the news has gotten even worse, with Israel attacking Iran and threatening to ensnare the U.S. in a Middle East war. Are markets playing a wait-and-see game? If the events of the past few months haven’t made markets change course, what will?
Some explain it as a decoupling of markets from the health of long-established American institutions. Indeed, economic gains have become increasingly uneven while public trust erodes. Viewed through this lens, America is a place where institutional dysfunction is on the rise while the country’s powerful economic drivers continue on autopilot.
The Senate is currently reviewing Trump’s proposed “One Big Beautiful Bill Act,” which, if enacted as currently outlined, could increase the federal budget deficit by up to $3.7 trillion from 2025 to 2034, according to Congressional Budget Office estimates. The projected gap stems primarily from a sharp drop in revenues, with the largest tax benefits favoring high-income households.
Historian Adam Tooze argues that today’s deficits reflect not national ambition but national gridlock—an inability to form majorities around bold investment or meaningful restraint. This paralysis weakens our fiscal credibility and democratic cohesion. Gone are the days when budget bills reflected a consensus on what we value or how to promote widespread economic benefits for the greatest number of Americans.
Resilience is An American Theme
Despite dysfunction, the U.S. remains a global powerhouse. It produces 26% of global GDP—unchanged since the early 1990s. It leads in innovation, energy production, and high-tech profitability. American households are wealthier per capita than their peers. Despite recent turbulence, the dollar remains the backbone of global finance.
America’s advantages are significant: demographic dynamism, high immigration (until very recently), decentralized governance, and resilient cities and states. There are plenty of historical precedents that demonstrate how the U.S. has emerged stronger from periods of internal crisis, including the Civil War, the Great Depression, the Vietnam war and Watergate, the long period of a gasoline crisis and stagflation, and the Great Recession of 2007 - 2009. America seems uniquely equipped to not only survive significant social and economic disruption, but to adapt and come out stronger.
This is not to gloss over our current chaotic state of government, which is not just a threat at home but to nations around the globe. In “The Strange Triumph of a Broken America,” (Foreign Affairs, Jan-Feb 2025) Michael Beckley points out the world is facing multiple, converging threats. China is engaged in the largest peacetime military buildup in history while threatening Taiwan. Russia is waging Europe’s biggest war since World War II, attempting to take over Ukraine. North Korea is providing soldiers for that war, while simultaneously preparing for war with South Korea. These struggles are not going to disappear overnight, and each one requires deep and thoughtful preparation on the part of the United States. The U.S. must contain these threats while simultaneously harnessing our own advantages. Domestic unity will be crucial not only to mend national fissures but also to fortify the United States against foreign threats, says Beckley.
For many reasons, market volatility may continue for some time. But there’s a lesson to keep in mind as we get caught up in second-guessing what tomorrow’s news will bring and how markets might react. This is why the past month was so instructive. Markets didn’t do what most investors expected.
Your portfolio at Cardiff Park is built on that same idea: we don’t know what will happen next. Period. But we can still prepare for tomorrow with strong and resilient portfolios diversified across asset classes, geography, and risk exposure, tailoring each plan to individual goals and timelines. Our aim is to eliminate unnecessary risks while embracing those that are essential to achieving your goals.
If you’d like to review your portfolio or revisit any part of your financial plan, please contact us. We’re here to help.
Regards,
John Gorlow
President
Cardiff Park Advisors
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