Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

Global equities had a strong month despite continued trade whipsaws, and elevated volatility. Non-US developed and emerging markets equities were both positive, though they underperformed US equities. Global small caps slightly outperformed large caps while growth outperformed value.

Trade remained the main market driver in May. The US and the UK announced a trade deal in early May with quotas announced on key exports. President Trump announced a 90 day pause on reciprocal tariffs in China, leaving in place a 30% duty for national security reasons. The S&P 500 surged 3.3% the day of the announcement. Negotiations between the US and the EU gathered momentum. At the end of the month, a federal court ruled against reciprocal and the 10% baseline tariffs, though it left sector-specific tariffs in place. The Trump administration said it would appeal the decision, and current tariffs will remain in place during the appeal. Equity markets rebounded over the month as investors assumed that the worst-case tariff scenarios were unlikely.

Bond markets fell over the month. Moody’s joined S&P and Fitch in downgrading the credit of US debt from AAA status. The subsequent auction of 20-year bonds sold at a yield over 5%, the highest since November 2023. The Republican-led House of Representatives shortly thereafter passed Trump’s “Big, Beautiful Bill.” Current tax cuts will be made permanent and new tax cuts will be introduced. Little was done to cut spending, raising concerns about the bill’s impact on the deficit.

Economic data was mixed but generally positive for the month. The unemployment rate remained at 4.2% in April, jobless claims increased less than expected, and nonfarm payrolls remained stable. US consumer sentiment as measured by University of Michigan Survey fell to its lowest since mid 2022, but April retail sales increased over March, exceeding expectations. Q1 US GDP contracted slightly, but by less than expected and far less than in 2022 Q1. This paints an overall picture of a stable or moderately slowing economy rather than an imminent recession.

Headline inflation in the US surprised to the downside for the third consecutive month, rising only 2.3% year-over-year in April, very close to target, and the lowest since early 2021. Headline inflation in other developed markets increased more than expected, with inflation rising to 3.5% in the UK, 2.2% in the Eurozone, and 3.6% in Japan. In a split vote, the Bank of England cut rates by 25bps. The Fed held rates steady.

The US dollar was slightly weaker in May. Real asset returns underperformed broad equities, even if returns were positive in absolute terms. Oil prices bounced back strongly as recession fears receded. Gold fell slightly by -0.1%, due to improving risk sentiment. 

Global equity markets declined in the first quarter as strong performance for international equities was offset by weak US returns. The Federal Reserve (‘Fed’) continued their cautious approach. Tariffs dominated headlines throughout Q1 with tariffs on Mexico & Canada early in the quarter initially being delayed before finally being implemented even if USMCA-covered goods remained exempt. China saw a significant increase in tariffs over the quarter. In mid-March, broad steel and aluminum tariffs were added, drawing retaliation from the European Union. Post quarter end, the Trump administration also announced on April 2nd, that reciprocal tariffs would be applied against all trade partners, with a 10% baseline and much higher tariffs on individual countries. Markets showed muted reactions at first, but as tariffs appeared to emerge as broad policy preference, trade fears sparked broad sell-offs in the U.S. equity market in the first quarter with a much more severe market reaction post quarter end. An additional headwind was the release of China’s AI tool ‘DeepSeek’ which questioned the narrative of unchallenged US leadership in AI and made investors wonder if the large AI investments can be recouped if cheaper AI alternatives come to the market.

Yields fell as investors looked for less risky assets and inflation cooled in February. The 2-year Treasury yield fell by ~36 bps from 4.25% to 3.89% during Q1, while the 30-year Treasury yield fell by ~19 bps from 4.78% to 4.59%. Credit spreads widened slightly during quarter. Gold rose materially due to safe haven demand and falling real yields, while concerns about slowing growth led to a drop in oil prices.

The Bloomberg US Aggregate Bond Index returned 2.8% in Q1 as falling yields created a tailwind for fixed income, partially offset by widening spreads. The MSCI ACWI returned -1.3%. As a result, a traditional 60/40* portfolio was basically flat.