Market Update: May 27, 2025

 

Welcome to the Monthly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this month.

The market has rebounded nicely following the 19% decline back in April. The S&P is up nearly 19% from the bottom as of May 27 and it does appear that the bear market caused by trade complications was short lived.

The big news item of the month was a credit downgrade on US sovereign debt from the credit agency, Moody’s. Moody’s is the last of the three major credit agencies to downgrade US debt. But largely, the market reaction was fairly muted to the credit downgrade.

The first credit agency to downgrade US debt was S&P back in 2011. Back then, the credit downgrade came in the midst of the recovery from the Global Financial Crisis and was seen as a shock to the stock market. The subsequent Fitch downgrade in August 2023 was a non-market moving event and I would bet that most people don’t even remember the Fitch downgrade.

The quoted reason for the Moody’s downgrade is as such: “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”

And this is essentially what Moody’s is referring to. The current Federal budget shows $1.865 trillion dollars in deficit spending relative to incoming revenue taxes. A big increase in spending has actually stemmed from rising interest rates which have increased debt servicing and is nearly $1 trillion in spending by itself. As the 2025 Congress continues to debate the future budget, extensions of the Tax Cuts and Jobs Act or TCJA are on the line. If the TCJA is extended, JP Morgan estimates the deficit spending will widen over the next 10 years resulting in federal net debt as a percent of GDP rising to 130% by 2035.

The combination of the Moody’s downgrade and the continued budget resolution process has resulted in a possible loss of confidence from bond investors in long term US treasuries. Shown here is a 20-Year treasury bond auction that occurred on May 21, 2025. During this auction, the treasury tendered $41 billion of bonds but investors only accepted $18 billion of those treasuries. This is a significant mismatch of supply of treasuries and demand from investors. The end result was a significant increase in 20-year treasury yields in the days following the auction. Importantly, it is critical that listeners not extrapolate the action in the treasury auctions to mean the loss of “reserve currency” status for the United States. This is simply a market reaction to important news out of Washington.

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Sources:

1. FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved May 27, 2025, from FactSet Database.
2. FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved May 22, 2025, from FactSet Database.
3. Moody’s Ratings. “Moody’s Ratings downgrades United States ratings to Aa1 from Aaa; changes outlook to stable.” Released May 16, 2025. Retrieved from https://ratings.moodys.com/ratings-news/443154
4. JP Morgan Asset Management. JP Morgan Guide to the Markets. Slide 23 “Federal Finances.” Updated April 30, 2025. Retrieved from https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/
5. Department of the Treasury. Bureau of the Fiscal Service. Treasury News: “Treasury Auction Results.” 20-Year Bond. Auction date: May 21, 2025. Retrieved from https://treasurydirect.gov/auctions/announcements-data-results/announcement-results-press-releases/
6. FactSet Research Systems. (n.d.). 20 Year Treasury Yield (Interactive Charts). Retrieved May 22, 2025, from FactSet Database.

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