What Caused Mid-May’s Market Sell-Off — and What Happens Next?

The sudden decline was driven largely by the bond market, not by any shift in the economy or corporate fundamentals.

By: CD Wealth Management | May 22, 2025

On Wednesday, the Dow closed down 1.9%, and the S&P fell more than 1.6%. That kind of headline catches people’s attention — and because so many people hear that number and wonder, “What’s going on?” we thought it would be helpful to share a brief explanation.

Why Did the Market Sell Off?

This was a technical sell-off — a sharp drop in stock prices driven by market mechanics, not news or economic events. In this case, the decline was driven largely by the bond market, not by any shift in the economy or corporate fundamentals. Among the factors:

• Budget bill: Concerns about a new budget bill have investors worried about a worsening of the U.S. deficit. If the bill were to pass, the debt level and inflation could rise.

• Moody’s downgrade: Over the weekend, Moody’s downgraded U.S. government debt from Aaa to Aa1 because of concerns over the growing national debt and a lack of meaningful fiscal reform. In turn, this means more spending on interest costs incurred from the national debt. Moody’s is now the third of the three major rating agencies to cut the U.S. credit rating from the top tier. The first downgrade happened in 2011, and the second came in August 2023, based on “erosion of governance” and repeated standoffs over the federal debt limit.

• Rising Treasury yields: Wednesday’s Treasury auction (20-year bonds) was weak, forcing yields higher — over 5% on 20- and 30-year bonds, and around 4.6% on the 10-year. As a reminder, the 10-year Treasury is used as a benchmark to other interest rates, such as mortgages and corporate bond yields.

• Investor reaction: Higher yields mean fixed income temporarily looks more attractive than stocks to some investors, which triggered selling in equities Wednesday.

Why Are We Sharing This Update?

We are not concerned by this drop, and we are not asking our clients to do anything. This is not a strategy shift; it’s simply an update to explain what you may be hearing in the news.

We believe moments like this should be understood, not feared. When the market falls more than 1.5% in a single day, people notice. And we’d rather our clients hear directly from us what’s driving it.

What Does This News Mean?

Treasury yields spiked due to short-term technical factors and reaction to the downgrade. The market is coming off a big run-up following the April sell-off.

At some point, the market may become oversold, and it will then find balance again — just as it has many times before. That’s how markets work.

• This does not mean the market is broken.
• This does not mean you need to take action.
• This does not change anything about our long-term approach.

What’s Next? Stay the Course.

For long-term investors, this moment — like all the others before it — is just that: a moment. We don’t build portfolios based on headlines. We don’t invest with a day-to-day mindset. And we don’t change course just because markets have a down day.

Wednesday’s dip will be another historical data point. Nothing more.

If anything, this type of market behavior often creates long-term opportunity, not long-term risk.

As always, if you’d like to discuss the market’s moves further, we’re here for you. But most importantly: We are focused on the big picture, and we want you to be, too.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.