The Dollar Is Left Behind
After a remarkably turbulent April sparked by major tariff announcements, May saw financial markets largely regain their composure. This was boosted by the joint decision between the U.S. and China to temporarily remove retaliatory tariffs. The S&P 500 gained 6.3%, while the tech-heavy NASDAQ composite was up a robust 9.6%, its best showing since November 2023. Overall, that left the major stock indices basically flat on the year. Similar trends could be seen in other markets as well. For instance, the 10-year Treasury yield rose from 4.16% at the start of the month, to nearly 4.60% on May 21 (the highest since mid-Feb), before ending the month at 4.40%. In the crypto space, Bitcoin continued its ascent, reaching an all-time high of $111,092 on its way to an 11.2% gain on the month. Much of what linked the price action in these different markets was ongoing improvement in investor sentiment and reversal of the early April shock. But things aren’t all they seem on that front, as the U.S. dollar followed a different path. After declining 4.6% in April to a three-year low, the dollar index actually ended May marginally lower. The currency’s lack of a recovery, especially in light of the moves elsewhere, was unexpected.The Dollar Divergence
The Shift Continues
There is an inverse correlation between yields and prices. Higher yields generally mean lower bond prices, and vice versa. Typically, yields move on investor expectations for growth and inflation. For instance, if investors expect a stronger economy, bonds that pay a fixed rate might become less attractive. Nevertheless, if investors find an asset less attractive, its price will generally decline. And because investments are bought with a currency, there can be ripple effects. In this case, higher Treasury yields should theoretically attract foreign capital and boost the dollar, yet that hasn’t happened. One possible reason is that geopolitical upheaval and heightened policy uncertainty may be leading to lower demand from foreign investors not just for Treasurys, but U.S. assets more broadly. There is some evidence for this: Developed International stocks are up nearly 15.0% year-to-date, while domestic stocks are barely positive. Rather than any broader economic judgment, the dollar's depreciation might be symptomatic of lower confidence in the investability of the U.S.Developed International Stocks Versus the United States Year-to-Date
Market Recap
Asset Returns
May 2025 Sector Total Returns
Macro
• The United States and China announced a temporary pause in retaliatory tariffs to give time for negotiations.
• While April CPI came in only marginally below consensus (0.2% vs. the estimate of 0.3%), PPI’s print of -0.5% was significantly below consensus for 0.2%.
• Conference Board’s consumer confidence index surged to 98.0, significantly above the estimate of 87.1.
• National home prices fell 0.1% in March, firmly below expectations for an increase of 0.3%.
• Regional Fed bank surveys of executives from manufacturing and service firms indicated that business activity rebounded in May but remains near multi-year lows.
Equities
• The S&P 500 forward 12-month price/earnings ratio rose from 20.4x to 21.6x, representing multiple expansion of 5.9%.
• Large-cap stocks beat small-caps by 1.0 percentage points, the sixth straight month of outperformance and longest such streak since mid-2021.
• Health Care stocks underperformed the broader market by 11.9 percentage points, the second-worst relative performance in history behind December 1999.
• For a second consecutive month, growth stocks handedly beat value stocks. Their 5.2 percentage point outperformance was the most since December 2024.
Fixed Income
• 2- and 10-year Treasury yields rose 24 and 30 basis points, respectively, the first month in 2025 where yields finished the month higher than they began.
• High Yield corporate bond spreads narrowed by 69 basis points, the biggest decline in spreads since October 2022.
• 10-year breakeven inflation expectations rose from 2.24% to 2.33%, while real (i.e. inflation-adjusted) Treasury yields rose from 1.94% to 2.07%.
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Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.