It was another chaotic month in politics, economics, and markets. We went from a de facto trade embargo with China to a détente, back to a period of elevated risk as accusations of broken agreements flew back and forth. Budget negotiations and fiscal concerns dominated US-centric news outlets. In Europe, cautious optimism about a potential de-escalation in Ukraine was replaced with President Trump’s outward frustration with Russian President Vladimir Putin and then a dramatic Ukrainian attack deep inside Russian territory. Times like these can often be stressful and confusing to investors, as it’s all too easy to get sucked into the day-to-day goings-on. From our perspective, investors would be well-served to stay focused on what matters to separate the signal from the noise.

What is it, though, that has mattered most over the last month?

While price action in equity markets was certainly noteworthy—the S&P 500 turned in its best May in nearly 30 years—what stood out is what we’ve been seeing in global bond markets. Sovereign yields in the US have continued to climb higher, with the US 2-year and 10-year Treasuries ending the month at 3.90 and 4.40, respectively. While these levels are down a bit from their mid-May highs, they’re well-off local lows seen in April of this year. Now, there are plenty of reasons that this may be the case. We’ve seen claims that bond vigilantes may send a message on US fiscal policy. In contrast, others are convinced that some combination of inflationary concerns or capital flight could propel higher yields. As is typically the case, it’s likely some combination of all the above and more. But what stands out is that this is not strictly a US phenomenon. Yields have been steadily rising in major markets like Germany, the UK, France, and, most notably, Japan for some time now.

In each instance, we can likely identify key culprits that could be behind the move higher. Yet, the aggregate signal is what matters most. At least for now, we are in a much different environment than we had been. The world is currently being forced to rethink what elevated yields could mean for everything from economic growth to fiscal policy and investment allocation. Investors are left wondering whether the move higher is cyclical in nature or whether structural changes are taking place.

Our Perspective

Here at Manning & Napier, it’s our opinion that the world may well be undergoing a series of structural shifts that will be measured in years and decades. These can greatly affect asset class returns and portfolio construction over long-term time horizons. Such shifts are almost necessarily volatile, as change is never comfortable and rarely easy. In many ways, the volatility we’re seeing in headlines reflects these changes. This view provides a lens through which to analyze the world and contextualizes much of what we see daily. In this volatility can lie opportunity.

Of course, this potential future is only one path forward, and things may play out far differently. That’s why we continue to focus on the balance between risk and reward. As active managers, we are committed to identifying investment opportunities no matter the environment while simultaneously managing risk for our investors and positioning our portfolios for any range of outcomes.

We have been cognizant of the downside risks to the US economy for some time now. The US economy has been on a softening trajectory, but growth has remained incredibly resilient due in large part to the massive fiscal transfers undertaken in the months and years following the pandemic and elevated household net worth. With the added uncertainty from US trade policy, we see an increase in downside risks. Market expectations have been a continuation of the strong economic growth we have seen over the last several years, and we believe this may be overly optimistic.

To be clear, this does not mean we are calling for meaningful economic weakness; rather, expectations look elevated relative to reality. With the Federal Reserve having paused its cutting cycle, it remains to be seen how the economy will respond to a prolonged period of elevated rates and uncertainty. Given the varied risks we see in the market today, we are placing an emphasis on risk management.

Our View

Economic Cycle		The US economy has remained resilient despite the aggressive hiking cycle we saw from the Federal Reserve. However, growth is slowing from above-trend levels. Can the US consumer continue to remain resilient? Could policy change be disruptive, or might factors such as deregulation support investment?
Stock Market		The US stock market continues to trade near all-time highs. Earnings expectations reflect a rosy outlook. With the Fed looking more cautious on its rate cutting cycle, can earnings growth support higher prices in the potential absence of multiple expansion?
Bond Market		Risks to the economy and inflation look balanced. While elevated levels of inflation and resilient growth could push yields meaningfully higher, a sudden slowdown in growth could also see cuts priced back into the market and yields fall from their current levels. Corporate spreads remain near their lows.
Important Issues on the Radar		Trade Policy: The new Administration has rolled out an aggressive trade policy at a time when the US economy is already slowing. It’s unclear how the US and its trading partners will navigate this ordeal, and we see the policy at the very least as having injected a great deal of uncertainty into the global economy.
		AI: Booming investment in semiconductors and AI infrastructure has been a feature of markets for years now. Will the release of lower-cost models lead to a reduction in investment or could increased efficiency super-charge these efforts? How may AI begin to have a real impact on businesses and the economy?

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Sources: Bloomberg.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.