The stock market continued to rise in May as investors welcomed the continued walk-back of the toughest tariff terms. Perhaps obvious at this point, but the on-again, off-again tariff campaign will dominate headlines for the foreseeable future as at the end of the month, we learned that trade talks with China have hit a rough point, as U.S. Treasury Secretary Scott Bessent admitted in a Fox News interview that negotiations have “a bit stalled” and President Trump has alleged that China has violated their trade agreement. Regardless, markets rallied in May, helping to get the benchmark S&P 500 back into positive territory for the year. Year to date, the S&P 500 is up +0.51%. The technology-heavy Nasdaq Composite and the Dow Jones Industrial Average remain down -1.02% and -0.64%, respectively.
The U.S. Court of International Trade attempted to relieve American businesses of $330 billion in import taxes. Still, a federal appeals court granted the Trump administration’s request to pause the decision temporarily. Additionally, the appeals court ruled that the tariffs could remain in place. In case the tariffs are struck down in court, the White House can employ various tariff tools, such as Section 232, Section 122, and Section 301, to replace them. It will be interesting to observe how the current trade negotiations proceed with these outstanding issues in the court system.
Overall, the equity market rally has been ongoing since the tariff cooldown on April 9th. Meanwhile, bonds are selling off, and the U.S. dollar is under pressure. A key development to observe is the declining interest in owning U.S. Treasuries, which indicates that the country may be heading toward a scenario marked by rising yields and, ultimately, a challenging period of austerity in the future. A sustained fiscal deficit of 7% is unsustainable and may be nearing its breaking point. The recently introduced Big Beautiful Bill undermines any pretense of fiscal discipline and could trigger a significant increase in the supply of Treasuries. The weakening dollar, coupled with rising yields, signals growing concern among foreign investors. These investors have traditionally been a crucial source of demand for Treasuries; however, they can now find higher yields at home without exposing themselves to currency risk. The increasing Treasury supply in the face of decreasing demand suggests that yields will likely rise structurally, which could negatively impact economic growth and lead to reduced government spending. While the trend toward higher yields is evident, the journey will be uneven as policymakers seek ways to mitigate this rise. Attempts to lower yields could create additional challenges, such as a weaker currency and escalating inflation. In the U.S., a declining currency might result in significant drops in the stock market, particularly as foreign investors, who are heavily invested, begin to withdraw. Ultimately, the era of considerable deficits will come to an end when it becomes untenable, whether through higher interest rates, increased inflation, or declining asset prices.
Best regards,
Stash J. Graham