Investors Buy the Dip and Stocks Recover from Morning Selloff: May 19, 2025

Market participants are paying no mind to the official reminder that the US could improve its fiscal health. Moody’s announced a downgrade of the world’s largest economy’s credit rating due to its mounting debt load and significant deficits. But equity and fixed-income investors have had enough of the “Sell America” mantra and chose to dive in and pick up stocks in most sectors as well as Treasuries across the curve following the initial volatility. Large-cap benchmarks have recovered from this morning’s losses and are now strongly positive. In rates, the earlier spike has reversed at the short-end and is now much more tempered from the curve’s belly out to the 30-year duration. Folks are also doing some buying in the commodity complex ex nat gas but are trimming dollar exposure in response to the agency’s downward adjustment regarding the nation’s financial condition.

Moody’s Becomes Third Agency to Downgrade US Debt

Moody’s Ratings wrapped up last week by downgrading the US’s credit rating from Aaa to Aa1, following similar actions by S&P Global in 2011 and Fitch in 2023. In all three instances, the assessments are just one level below the figure indicating maximum reliability. In announcing the downgrade, Moody’s cited ballooning federal debt and problematic budget deficits. The US currently has an annual deficit of nearly $2 trillion over $36 trillion in debt.

Growth Solves a Lot of Problems

Sovereign debt problems are common across the world. Rather than curtail deficit spending, governmental leaders have opted for the path of least resistance, kicking the can down the road as imposing austerity measures in the short term is damaging to economic activity and incumbent political decision makers as a result, thereby opening the door for opposing parties to appease the constituency. Furthermore, demographics have been a key factor, with aging populations generally favoring social benefits. So, in an environment where no one wants to cut outlays, for the most part, due to fear of lower and middle-income voters turning against them, no one wants to raise taxes either because that reduces the motivation of investors and employers that carry heavy influence and are instrumental in expanding the economy. In consideration of this challenging backdrop, the most practical mindset going forward is to focus on growth, a strategy that explains why the US has been able to maintain sizeable deficits while outperforming global peers by a wide margin from both a GDP and markets perspective.

International Roundup

China’s Industrial Production Beats Expectations

China’s Industrial Production exceeded expectations in April despite decelerating and unemployment declined modestly, but home prices continued to fall and retail sales were weaker than anticipated.

Industrial production was 6.1% higher year over year (y/y), exceeding the estimate of 5.5% but slowing from March’s 7.7%. A government spokesperson says industrial production was resilient because China increased trade with other partners in response to the US imposing significant tariffs on the country’s products. As part of a 90-day truce, the US has rolled back the tariffs to 30%, which include a 10% general duty as well as a 20% levy due to China failing to meet President Trump’s demands to curtail the illegal production of fentanyl. In another positive development, China’s unemployment rate fell from 5.2% in March to 5.1% last month.

China’s real estate glut, however, continued to ding the economy with home prices falling 4% y/y in April after weakening 4.5% in the preceding month. In another sign of economic distress, April retail sales grew only 5.1% y/y, coming in beneath the 5.5% median estimate and slowing from the prior month’s 5.9%.