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“If every instinct you have is wrong, then the opposite would have to be right.” – Jerry Seinfeld
Jerry Seinfeld’s advice to his buddy George Costanza on the old sitcom Seinfeld has felt relevant to investors lately. But unlike Costanza’s decision to order chicken salad on untoasted rye, the smarter move for investors may have been to do nothing at all. Just as $74 billion flowed out of equity mutual funds and ETFs,1 the market bounced back into positive territory for the year.2 Cursed again by our action biases!
To be fair, the fundamentals haven’t shifted much. Tariffs remain elevated,3 and business sentiment is still historically weak.4 Yet markets have rallied,5 likely because we’ve moved past peak policy uncertainty.6 There are signs that certain market pain points are forcing the administration to soften its more extreme trade stance.
Looking ahead, do markets need full clarity on trade to keep rising or just incremental progress? Recent history favors the latter. In December 2018, President Trump agreed to a 90-day trade truce with China. The phase-one deal wasn’t signed until January 2020, but the market performed quite well in the interim.7
Serenity now!
Rumors of the demise of demand for U.S. Treasuries have been greatly exaggerated in my opinion. Markets absorbed May’s Treasury auction, with little evidence to support fears of foreign Treasury boycotts. In fact, the average 10-year U.S. Treasury note bid-to-cover ratio over the past three months is slightly above the long-term average.8 I’d expect U.S. Treasuries to continue to trade based on expectations of monetary policy and nominal growth, and not on concerns of fiscal sustainability.
Meanwhile, from Moody’s Investors Service: “This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”
Moody’s downgraded U.S. government debt on May 16, echoing similar past actions. Standard & Poor’s did so 14 years ago, and Fitch two years ago.9 In short, this isn’t new.
The current downgrades, like those before them, don’t pose a structural threat to the U.S. Treasury market. U.S. Treasuries are their own asset class and thus are insulated from forced selling. It’s also important to remember that the US is an exceptionally wealthy nation. While government debt stands at approximately $37 trillion,10 total U.S. household net worth is nearly $160 trillion.11
There are also viable policy options available to help curb the growth of national debt. Ultimately, it’s a question of political will.
President Trump recently said, “Now, if the chairman of the Fed...if he would lower interest rates like China did, like I think the U.K. did, but like numerous other countries have done, it would be, it’s like jet fuel...but he doesn’t want to do it…Probably he’s not, he’s not in love with me.”
It’s unlikely that Federal Reserve (Fed) Chairman Jerome Powell’s personal views toward the president have any bearing on Fed policy. It currently finds itself in a difficult position: Tariffs are expected to slow economic growth while simultaneously pushing prices higher, at least in the short term.
Meanwhile, as the U.S. faces potential shortages and rising prices, China and countries in Europe may be dealing with the opposite problem: An oversupply of goods originally intended for export. For the U.S., the challenge is near-term inflation; for much of the rest of the world, it could be near-term deflation. That contrast helps explain why central banks globally are shifting toward more accommodative policies.
My suggestion: Don’t fight the European Central Bank or the People’s Bank of China.
The answers to three questions help guide our investment views in our Portfolio Playbook.
1. Where are we in the cycle? A recession doesn’t appear imminent. If it were, credit spreads would likely be significantly wider.12
2. What’s the direction of the economy? Global growth is expected to remain below trend and continue to deteriorate.13
3. What are the policy implications? Policy easing is ongoing, with more aggressive measures being implemented outside the U.S.
Given this backdrop, a prudent investment approach could be to focus on improving portfolio quality and reducing valuation. Diversifying beyond mega-cap U.S. growth stocks into value, mid-cap, and international stocks may help reduce overall portfolio valuations.14 A lower-valuation portfolio may offer downside protection and may be well-positioned to benefit from a potential global economic recovery.
Brian Levitt is a Global Market Strategist at Invesco and co-host of Invesco’s “Market Conversations” podcast.
Notes
1. Source: Investment Company Institute, May 7, 2025. Latest data available. Mutual fund data represent estimates of net new cash flow, which is new sales minus redemptions combined with net exchanges, while exchange-traded fund (ETF) data represent net issuance, which is gross issuance less gross redemptions. Data for mutual funds that invest primarily in other mutual funds and ETFs that invest primarily in other ETFs were excluded from the series.
2. Source: Bloomberg L.P., May 19, 2025. The year-to-date total return of the S&P 500 Index as of market close on May 16, 2025, was 1.80%.
3. Source: United States International Trade Commission, May 2025.
4. Source: CEO Executive Magazine, April 30, 2025. The CEO Confidence Index is a monthly survey of chief executives. Each month, Chief Executive Magazine surveys CEOs across corporate America at organizations of all types and sizes to compile and create an index.
5. Source: Bloomberg L.P., May 19, 2025. Based on the return of the S&P 500 Index since the recent market trough on April 8, 2025.
6. Source: Baker, Bloom, & Davis, May 18, 2025. Based on the US Economic Policy Uncertainty Index, a widely used metric to quantify economic uncertainty related to policy decisions. It hit a 2025 peak on April 5, 2025.
7. Source: Bloomberg L.P., May 19, 2025. The S&P 500 Index returned 31.5% in 2019. Past performance does not guarantee future results.
8. Source: US Treasury, May 6, 2025. Latest data available. The bid-to-cover ratio measures the total amount of tenders and the total amount of Treasury accepted bids on a competitive basis. Generally, this number is positively correlated to demand (the larger the number, the greater the demand).
9. Source: Standard & Poor’s, Fitch Ratings.
10. Source: US Treasury, Dec. 31, 2024.
11. Source: US Federal Reserve, Dec.31, 2024.
12. Source: Bloomberg L.P., May 19, 2025. Based on the option-adjusted spread of the Bloomberg US Corporate High Yield Bond Index, which measures the US dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, adjusted to account for an embedded option, such as calling back or redeeming the issue early. The Bloomberg US Corporate High Yield OAS on May 19, 2025, is 303 basis points compared to a long-term average of 498 basis points.
13. Sources: Bloomberg L.P., MSCI, FTSE, Barclays, JPMorgan, Invesco Solutions research and calculations, from Sept. 1, 1992, to April 30, 2025. The Global Leading Economic Indicator (LEI) is a proprietary, forward-looking measure of The Global Leading Economic Indicator (LEI) is a proprietary, forward-looking measure of the growth level in the economy.
14. Source: Bloomberg L.P., April 30, 2025. Based on the price-to-earnings ratio of the S&P 500 Index (23.8x) compared to other indexes such as MSCI Europe Index (14.7x), Russell 1000 Value Index (18.5x), and Russell Midcap Index (20.4x).
Disclaimer
© 2025 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of May 20, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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