To predict the rain, or build the Ark?

– In his second term, U.S. President Donald Trump indeed delivered as he promised, but not in the way either the markets or his voters expected. His tariff salvo has thrown global markets into disarray. To many, it seems like he has outright lied. Take his promise to “make America great again.” Yet, that can’t be achieved by his unrealistic views and actions. The mass firings by Elon Musk under the pretext of “government savings,” which effectively left hundreds of thousands of people without an income overnight, didn’t help either.

– Americans feel that Trump is not as “ethical” as he claims to be. His recent decision to accept a plane from Qatar as a gift hasn’t been lost on his voters. After all, Trump’s anti-establishment election campaign was based on promoting himself as the best candidate to “eradicate corruption” in the government, claiming he wasn’t in it for financial gain given his extensive wealth. To some, he now seems as corrupt as the next President or government official, and some even view the Trump administration as borderline autocratic.

– Equity markets around the world did well in May as Trump softened his stance regarding the global trade war and tariffs although U.S. stock markets still didn’t fully recover. As of May 23^rd, the S&P 500 index was up by +4.2% on the month, reducing its year-to-date decline to -1.3%. The tech-heavy NASDAQ composite fared even better, spiking by +7.4% in May. Despite this phenomenal performance its year-to-date return remained in the red at -3%.

– The downward trend in bond yields began to gradually reverse once Trump administration started discussing global tariffs, which are expected to be inflationary particularly for U.S. consumers. In May, the reversal and spike in bond yields was obvious across the entire yield curve. In line with this increase in bond yields, as of May 23^rd, the Bloomberg Global Aggregate Bond Index and the Global Corporate Bond Index were both down by -1% and -0.6% on the month.

– After a phenomenal run last year, cryptocurrencies had struggled in the current climate of uncertainty triggered by the Trump administration. However, they all came back strong in May in line with the positive equity market sentiment. As of May 23^rd, Bitcoin surpassed 108,000 mark delivering +14.5% during the month bringing its year-to-date return to +15.5%. Meanwhile, Ethereum gained a whopping +41.7% in May.

– In May gold solidified its role as a safe-haven asset amid the chaos. Throughout the month, gold prices marched higher as traders sought refuge from equity volatility and hedged against the prospect of rising inflation due to tariffs. By May 23^rd, the first month futures contract for gold was up by +2.3% on the month, adding to the metal’s impressive advance. This brought its year-to-date return to +28.5%, making it one of the best-performing major assets so far this year.

– Crude oil had a very strong month. Oil prices recovered from April as the concerns that a spiraling trade war could undermine global growth and energy demand started to fade. This marks a sharp reversal from last year, when oil prices were relatively stable. As a result, as of May 23^rd, the first month futures contract for U.S. crude oil WTI was up by +5.7%, although this wasn’t sufficient to offset its losses from earlier in the year, delivering -14.2% year to date.

– Turkish equities were positively impacted by the May global equity uptick. By May 23^rd, the Borsa Istanbul Index (BIST100) was up by +3.1% in local currency terms (+1.8% in U.S. dollar terms) over the month. This brought its year-to-date return in local currency terms to -4.8% (-13.7% in USD). The performance of BIST100 in U.S. dollar terms underperforming its return in local currency on an annual basis is due to the appreciation in the greenback against the Turkish lira by +10.2% since the end of 2024.

– It is likely that Trump may continue on this warpath and wreak even more havoc. Looking ahead, we advise investors to remain extra cautious and be defensively positioned. Until there is clarity on U.S. trade policy direction and its economic fallout, volatility may stay elevated. Investors would do well to keep some “dry powder” in the form of cash or short-term safe assets, and to maintain allocations to hedges like gold, which have proven their worth in this tumultuous period.

–The recent activity in international markets underscores the value of having “risk mitigation” assets in a portfolio when unpredictable events roil the markets. This means there needs to be a moderate amount of not just government but also investment grade and high yield bonds in longer term portfolios. As legendary investor Warren Buffett wisely put it, “Predicting rain doesn’t count; building an ark does.” In other words, rather than trying to guess every market downturn, make sure your financial ship is built to weather the storm.

In his second term, U.S. President Donald Trump indeed delivered as he promised, but not in the way either the markets or his voters expected. His tariff salvo has thrown global markets into disarray. Since coming into power in late January, he has caught not just the markets but even his own Republican party and its voters by surprise. As a result, Trump now holds the two lowest 100-day approval ratings since 1953, when Eisenhower was President, although in his second term he is arguably doing better with 44% approval than his first term where he had 41%. The fact that he lost 3–4% approval in both cases is not necessarily a badge of honor.

The source of his weak approval rating may appear to be his approach to global trade. Yet, it is not that simple. Americans are not just frustrated by the tariffs Trump slapped on his trade partners. After all, why would an average American really care about some economic mumbo jumbo that has no direct impact on their life? The real issue is the disconnect between what Trump promised and what he is delivering. To many, it seems like he has outright lied. Take his promise to “make America great again.” Yet, that can’t be achieved by making everyday goods more expensive for Americans based on some unexplainable and unrealistic calculation that he himself devised… or through randomly arresting its own citizens and that of its neighbors like Canada at the border for their political views that don’t align with his own. The mass firings by Elon Musk under the pretext of “government savings,” which effectively left hundreds of thousands of people without an income overnight, didn’t help either.

AMERICANS FEEL THAT TRUMP IS NOT ETHICAL

Worse yet Americans feel that Trump is not as “ethical” as he claims to be. His recent decision to accept a plane from Qatar as a gift hasn’t been lost on his voters. After all, Trump’s anti-establishment election campaign was based on promoting himself as the best candidate to “eradicate corruption” in the government, claiming he wasn’t in it for financial gain given his extensive wealth. To some, he seems as corrupt as the next President or government official, and Americans seem to be viewing the Trump administration as borderline autocratic.

MARKETS CAUGHT OFF GUARD BY TARIFF CHAOS

None of this bodes well for the financial markets — an erratic President armed with the tools of one of the most powerful economies in the world, who runs a country like a corporation and treats its own citizens like employees.

Investors had been aware of Trump’s protectionist bent, but the sheer magnitude of his tariff bombshell was far beyond expectations. The result was chaos across asset classes, as previously flagged risks around policy unpredictability and inflationary pressures came to the forefront in a dramatic fashion.

Markets quickly repriced risks in the wake of the tariff shocks that escalated, then de-escalated by Trump unexpectedly, and then re-escalated once again as Trump saw fit. The sudden unpredictable trade war fueled fears of higher consumer prices and weaker corporate profits, undermining the fragile confidence that had tentatively returned after 2025 first quarter. In effect, Trump’s aggressive “America First” trade strategy aimed at making the U.S. “great again” has instead made global investors fearful again. The turmoil in the first five months of the year is a vivid confirmation of warnings we’ve issued in recent months: when geopolitical surprises strike, markets can quickly shift from complacency to turmoil. With that backdrop, let’s review how major asset classes performed through this turbulent month.

GLOBAL EQUITIES STARTED TO RECOVER FROM THE TRADE SHOCK

Equity markets around the world did well in May as Trump softened his stance regarding the global trade war and tariffs although U.S. stock markets still didn’t fully recover. As of May 23^rd, the S&P 500 index was up by +4.2% on the month, reducing its year-to-date decline to -1.3%. The tech-heavy NASDAQ composite fared even better, spiking by +7.4% in May. Despite this phenomenal performance its year-to-date return remained in the red at -3%. The Canadian S&P/TSX composite also had a good month, delivering +3.7% in May, bringing its year-to-date performance to +4.5% as Canada emerged from the elections in April with a clear winner under new Liberal Party leader and Prime Minister Mark Carney.

European stocks and emerging markets also had a good month and held up better than U.S. markets on a year-to-date basis. The Eurozone stock index Euro Stoxx 50, added +3.2% in May, bringing its year-to-date return to +8.8%. The global emerging markets equity index MSCI EM did even better, delivering +5.6% over the same period with a decent +10.6% year-to-date return. With all regions up, global equities as a whole did well too. The MSCI All-Country World Index (ACWI) added +4.5% in May, bringing its year-to-date return to +4.1%.

BOND YIELDS ROSE DUE TO INFLATION FEARS

As our readers may remember, we have been discussing the fact that since the end of April 2024, long-term bond prices had been on the rise (meaning yields had been dropping), with the exception of October and December when bond prices dropped (meaning their yields increased). This downward trend in yields began to gradually reverse once Trump administration started discussing global tariffs, which are expected to be inflationary particularly for U.S. consumers. In May, the reversal and spike in bond yields was obvious across the entire yield curve.

This increase in yields was driven both by an increase in real rates as well as expected inflation. As a quick reminder, while shorter durations are driven by central bank interest rate decisions, longer-term maturities rely more on expected inflation and real rates. In a simplified form: nominal rate = expected inflation + real rate.

The graph below illustrates how bond yields changed over the last year, particularly how the long term yields spiked in May 2025 (red line in the graph below).

Source: Bloomberg

In line with this increase in bond yields, as of May 23^rd, the Bloomberg Global Aggregate Bond Index and the Global Corporate Bond Index were both down by -1% and -0.6% on the month, while the High Yield Bond Index had a decent month delivering +1.1%. The same indices delivered +1.2%, +1.5%, and +2.3% respectively since end of 2024.

BITCOIN AND ETHEREUM HAD A GREAT COMEBACK

After a phenomenal run last year, cryptocurrencies had struggled in the current climate of uncertainty triggered by the Trump administration. However, they all came back strong in May in line with the positive equity market sentiment. As of May 23^rd, Bitcoin surpassed 108,000 mark delivering +14.5% during the month bringing its year-to-date return to +15.5%. Meanwhile, Ethereum gained a whopping +41.7% in May, although this wasn’t sufficient to bring its year-to-date return back into positive territory, delivering -24% year-to-date.

GOLD EXTENDED ITS RALLY

Gold shone brightly once again in May, further solidifying its role as a safe-haven asset amid the chaos. Throughout the month, gold prices marched higher as traders sought refuge from equity volatility and hedged against the prospect of rising inflation due to tariffs. By May 23^rd, the first month futures contract for gold was up by +2.3% on the month, adding to the metal’s impressive advance. This brought its year-to-date return to +28.5%, making it one of the best-performing major assets so far this year.

CRUDE OIL RECUPERATED

Crude oil had a very strong month. Oil prices recovered from April as the concerns that a spiraling trade war could undermine global growth and energy demand started to fade. This marks a sharp reversal from last year, when oil prices were relatively stable. As a result, as of May 23^rd, the first month futures contract for U.S. crude oil WTI was up by +5.7%, although this wasn’t sufficient to offset its losses from earlier in the year, delivering -14.2% year to date.

TURKISH STOCKS HAD A GOOD MONTH

Turkish equities were positively impacted by the May global equity uptick. By May 23^rd, the Borsa Istanbul Index (BIST100) was up by +3.1% in local currency terms (+1.8% in U.S. dollar terms) over the month. This brought its year-to-date return in local currency terms to -4.8% (-13.7% in USD). The performance of BIST100 in U.S. dollar terms underperforming its return in local currency on an annual basis is due to the appreciation in the greenback against the Turkish lira by +10.2% since the end of 2024.

IT IS NOT OVER YET

While markets may be caught off guard, we had warned our readers against such a possibility before the President’s inauguration in January 2025. In our 2024 recap published in our January 2025 issue, we noted:

What will the Trump administration focus on in its first 100 days?

When considering the upcoming year, the first place to look at is the current status. We think the key determining factor for 2025 will be the policies implemented by Trump presidency… This will definitely be a global matter as Trump is very keen to disrupt the existing global trade structures with an effort to make US more competitive. It is no secret that his first 100 days in office will be focused on trade relations with China, and potentially Europe. The NAFTA, or with its new name USMCA, that dictates trade relations between US, Mexico and Canada is up for review in 2026… Given US and Canada have the largest bilateral trade relations in the world, any significant change could prove to have major repercussions not just for these two countries but globally as well… because a good portion of that trade includes natural resources.

It is not clear if these renegotiations may have an inflationary impact or just remain as a one-time price change. However, we already know what happened during the last Trump administration… the price increases turned out to be inflationary. There is also the risk that a potential trade-war may weigh on global growth. This is one downside risk that investors should keep a close eye on.

We don’t believe there is any new development that would undermine this view. To the contrary, it is likely that Trump may continue on this warpath and wreak even more havoc. Looking ahead, we advise investors to remain extra cautious and be defensively positioned. The abrupt market reactions earlier in 2025 highlight how quickly conditions can deteriorate when confidence is shaken by policy surprises. Until there is clarity on U.S. trade policy direction and its economic fallout, volatility may stay elevated. Investors would do well to keep some “dry powder” in the form of cash or short-term safe assets, and to maintain allocations to hedges like gold, which have proven their worth in this tumultuous period. Case in point, with this month’s climb, gold is hovering near multi-year highs. Its continued strength underscores the value of having “risk mitigation” assets in a portfolio when unpredictable events roil the markets.

Investors should also be extra cautious regarding holding US bonds and US dollar during this period. Both of these are normally considered safe haven assets which tend to hold or appreciate in value during times of financial distress. However, given the source of the current distress is the US and part of the issue is inflationary pressures particularly in the US, neither of these can be used properly for defensive purposes in a portfolio.

DO NOT ABANDON LONG-TERM STRATEGIES

That being said it is important not to overreact by abandoning long-term strategies such as a healthy dose of equities and bonds. Instead, investors should ensure their portfolio’s risk level aligns with their tolerance for further shocks. This means there needs to be a moderate amount of not just government but also investment grade and high yield bonds in longer term portfolios. We have discussed what other defensive instruments can be used in our previous issues which may be worthwhile to review.

As legendary investor Warren Buffett wisely put it, “Predicting rain doesn’t count; building an ark does.” In other words, rather than trying to guess every market downturn, make sure your financial ship is built to weather the storm. This prudent, belt-and-suspenders approach is invaluable when navigating markets as unpredictable as these.

Under the circumstances, we believe investors would benefit from a more defensive investment portfolio as opposed to an aggressive one, with a focus on the long term. We continue to believe investors need to brace for impact. Considering Trump’s unpredictable nature and aggressive determination to win at all costs, and the recent market reaction in response, we continue to think 2025 may turn out to be a painful year for investors and non-investors alike.

Note: Cover image created by Gemini, an AI assistant.

Ela KARAHASANOGLU, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/