May – Don’t go away just yet

During the month of May, all conventional wisdom went out the window. Indeed, history taught us that stock markets do not like trade wars (remember the 2018-2020 US-China trade war?). And all economic theories indicate that this trade war is damaging. Yet, in this US vs the world trade war of a magnitude that dwarves the previous one, markets are significantly up.  Despite a couple of short-lived scares, we witnessed a significant rebound in equity markets. Even US indices, which were deep into negative territory on a year-to-date basis are back in positive, with the exception of the Nasdaq, which despite performing 9.6% in May remains at -0.83% so far this year and Japan and China also nicely up this month but down so far in 2025.

Data source : Bloomberg

While tariff threats continue to creep in the shadow, the rather underwhelming reaction from trading partners and the repeated postponements have earned the US President the unflattering acronym “TACO” trade or “Trump always chickens out”. Could investors be giving Trump too little face and discount the potential threat a little too much? We should be safe until the July deadline, but will monitor closely.

In other news, the US April inflation surprised everyone by falling slightly to 2.3% from 2.4%, while GDP growth remained stable at 2.8%. Again, this is quite different from what should have happened under a tariff regime. We also witnessed renewed enthusiasm in US PMI (Purchasing Managers’ Index), up 2 points in both manufacturing and services.

Meanwhile, eurozone inflation also went slightly down to 2.4%, but growth remains unimpressive at 0.3%. The good news is that German growth is finally picking up a bit of steam and staying out of a recession for the time being.

Over in China, growth is lower than we had become accustomed to at 1.2% and inflation is close to 0% and PMI is in neutral territory, therefore, it can be said that they are holding things together quite well in the face of the tit for tat it has going on with the US.

Our summary recommendations

Once again, we used the very short-lived volatility events in our favor to add low-strike products to our clients’ portfolios, with high single digit coupons and protection on the downside in case things turn sour.

Moreover, our prudent positioning in equities, bonds and high allocation to low or decorrelated alternative investments enables us to limit the impact on portfolios and sleep at ease through the various Trump announcements.

Let us see where the tariff negotiations are heading and whether time proves TACO or history right, before we make big changes.

Chart of the month

The chart shows the US consumer sentiment, as measured by the University of Michigan survey. The monthly survey measures US consumer attitudes toward personal finances, business conditions, and economic activity.

The May figure came very close to the all-time low of June 2022, when inflation was very high and interest rates were hiked by the Fed at a fast pace. Even during the worst of Covid, it never reached these levels.

This is one of those times when the sentiment is a poor reflection of the stock market and the discrepancy is evident. 

Source: Bloomberg

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