June 2, 2025
May 2025 Market Commentary
TACO was the mantra for May. Trump Always Chickens Out. The expectation has come about that the market sells off when Trump threatens draconian tariffs and other steps, only to “chicken out” when the negative reaction occurs. This is followed by a rally. The cycle has played out several times now and the expectation is that the worst outcomes are unlikely to occur. As a result, the market has bounced back to its levels of earlier in the year. Nobody takes Trump’s threats very seriously at this point as the repeated indecisiveness has destroyed Trump’s credibility.
As a result, stocks have climbed out of their hole. For the month, the S&P 500 rebounded from a YTD loss of -5.3% in April to a gain of 0.5% by May 30. Foreign stocks fared even better, as investors remain more confident in foreign stocks in 2025. The YTD returns of the Morgan Stanley All Cap World Index increased from -1.4% in April to +4.2% YTD by May 30.
The Bond Market tells a different story, and many believe that Fixed Income investors often have a more accurate long-term view. Bonds sold off as investors worried about increasing US Deficits under a new tax plan pushed by the Trump Administration. Meanwhile, foreign holders decreased their holdings in US Treasuries, and sentiment worsens among fixed income investors.
Illustrating this point were moves in the US 10- & 30-year Treasuries, which saw yields increase, respectively, from 4.16% in April to 4.41% in May for the 10-Year, and from 4.69% to 4.94% at the end of May for the 30-year, though down somewhat from peaks of 4.61% and 5.09%, for the 10 & 30 year, respectively, on May 21. This pessimism was also observed in the broad fixed-income indices, with AGG (the iShares US Aggregate Fixed Income Index ETF) falling from a YTD gain of 2.2% in April to 1.2% in May.
Looking forward, it is hard to see how stocks should continue to move upward significantly, while uncertainty remains a constant. The impact of economic developments continues to unfold, including price increases at major retailers such as Walmart, tariffs continue to impact prices throughout the economy, dramatic reductions in imports occur, US tourism suffers from major declines in foreign visitors, and consumers become more cautious. The impact surely will begin to be observed in corporate earnings through the end of 2025 and into 2026. As this occurs the market may not sell off significantly, but continued advances will remain unlikely.
May 3, 2025
April 2025 Market Commentary
Volatility ruled the markets in April. A major sell off occurred after “Liberation Day” on April 2, with markets reacting negatively to worldwide tariffs imposed by President Trump. A recovery then ensued as most tariffs were delayed, yet again, for ninety days. As a result, the market essentially ended the month where it began. However, excessive tariffs remain against China, which have effectively resulted in a near cessation in trade between China and the United States. As the month ended, predictions of shortages and empty shelves were made, as container shipping has fallen precipitously.
Meanwhile, bonds fluctuated as investors reacted to market events, pondered the reliability of US Treasuries, and tried to predict future economic performance for the US and World. The US Ten Year Treasury fluctuated in a range from 4% – 4.5%, and ended the month with a yield of 4.31%, ten basis points higher than where it began the month.
US GDP contracted by 0.3% in the first quarter as imports surged in an effort to front-load supply chains ahead of tariffs. As April played out and the focus shifts forward most pundits predict lower economic growth in the best-case scenario, with some observers predicting a recession. For the moment, consumer spending and job growth are both holding up, although other key indicators, such as home sales, observed a significant slowdown.
All things considered it is hard to envision major growth in equity valuations given the current climate, elevated valuations, and the possibility of additional sell-offs that may occur given continued uncertainty that is likely to persist for months or years to come. In such an environment investors should not expect major gains, and should remain vigilant for potential declines.
Apr 6, 2025
Mar 2025 Market Commentary
Market psychology continued to sour in March, with a decline of nearly 6 percentage points for the month, before plummeting on April 3 & 4, resulting in a YTD loss of -13.7% for the S&P500 by April 4. Of course, the cause can be summarized in one word. Tariffs.
Bond yields held steady in March, before a 30-basis point plunge took place on April 3 & 4, taking the yield on the US 10 Year Treasury down to 3.93%. The rapid drop represents a “flight to quality” as stock holders dump stocks and flee to the safety of US Treasuries.
The disastrous and highly ill-conceived plan to blow up the world order and somehow transform the United States into some 1960s nostalgic and naïve vision of manufacturing nirvana may go down as one of the worst economic decisions of the 21st Century, destroying jobs, throwing the US and world economies into recession, and potentially leading the world from an imperfect system of economic cooperation and trade, into one filled with the threat of military conflict on a broad scale.
Just as the United States evolved from an economy focused on agriculture in the 19th Century (with the majority of people working on the farm) to one focused on manufacturing in the 20th Century, the United States has already transitioned into an economy focused on services in the 21st Century. Wealth and jobs are no longer created by manual labor in factories, but rather with brains in fields such as technology, software, health, pharmaceuticals, artificial intelligence, entertainment, finance, education, and other services. The United States enjoyed large scale trade surpluses in these areas, before incurring the hatred of the entire world.
The naïve notion that factories will thrive again in the United States, filled with legions of manual laborers, is delusional. Any manufacturing that does return to the United States, which itself is very much in doubt, will be filled with robots, computer controls, automation, and technology. Any people working there will need to have the ability to manage this technology, and there will be far fewer of them than the lost jobs destroyed in more promising and forward-looking industries. Does any sane person truly believe that manual labor jobs paying $1-3 per hour in China, Mexico, Vietnam, and other countries will be replaced with Americans earning $30-50 per hour (or more) with benefits included? Such a massive disruption in the cost structure to produce products will lead to unprofitable and non-competitive industries, massive inflation for consumers, and dramatically reduced demand and jobs.
The best-case outlook for markets for the balance of 2025 is that they hold steady, after a period of disruption. The worst-case scenario is that the bloodletting has just begun.
Mar 3, 2025
Feb 2025 Market Commentary
Market psychology turned more bearish in February, and uncertainty began to take hold. With turmoil over the on again, off again tariffs, disruption of government payments, and the hit to consumer psychology about job security driven by the DOGE (Department of Government Efficiency) actions, the market retreated. Bullish sentiment since the November Election was overshadowed by these recent events, and the broad market indices all declined for the month. The S&P 500 declined by 1.92%, the Dow Jones Industrials by 2.33%, and the NASDAQ by 2.84%. Investors grew more concerned about the prospects for the “Magnificent Seven” (i.e. Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, & Tesla) and became more interested in the “S&P 493”.
Paradoxically, mounting concerns over uncertainty resulted in a “flight to quality,” and investors shifted funds to bonds. Signs of a weakening economy also resulted in declining yields. As a result, the US Ten Year Treasury witnessed a decline in yield from 4.54% on January 31 to 4.22% by February 28.
The damage to market and consumer psychology seems to be almost entirely self-inflicted. With households increasingly worried about layoffs (whether directly impacted Government workers or just nervous consumers), and corporations unable to forecast demand, supply costs, supply chain disruptions, and other key factors, the natural response is to “circle the wagons” and hoard cash. How can one run a business when key economic inputs and market drivers are disrupted and changed on a daily basis by 2AM social media posts? What to do? Put plans on hold, lay people off, and “wait and see.” It appears that the economy may just go into the ditch for no reason other than complete uncertainty about what lies ahead. As a result, stocks are selling off.
Feb 6, 2025
Jan 2025 Market Commentary
January could be characterized as the “calm before the storm” in terms of stock and bond market performance. In general, investors had an optimistic mindset, anticipating increased earnings and higher stock market performance driven by lower regulation and the assumption that threats of tariffs and other measures were merely a “negotiating tactic,” but would never actually materialize.
Driven by this rosy outlook, stock markets generally advanced, and bond yields eased throughout the month. The S&P 500 gained 3.3% in January, peaking two days after the Inauguration at 6118, before falling back to 6040 at month’s end, up from 5868 at the beginning of the year.
Meanwhile, bonds also advanced during the month. The US Ten Year Treasury began the year with a yield of 4.57%. Yields increased in the first half of the month, as investors grew concerned over deficit spending and increasing inflation. Yields peaked at 4.79% on January 14. The US Federal Reserve then made clear that it remained cautious about the prospects of continued inflation. Market sentiment shifted, anticipating that the Fed would likely slow rate cuts to perhaps one or two in 2025. Other market observers opined that rate cuts would not materialize at all. Others, that the Fed might increase rates to stem further increases in inflation. This more hawkish view increased confidence that inflation might be slowed, and the rate on the US Ten Year Treasury declined back to 4.54%, ending the month about where it began. Overall, the US Aggregate Fixed Income market gained 0.5% for the month.
As we entered February the sentiment suddenly shifted once again. The announcement of 25% Tariffs on Canada and Mexico and 10% on China put fear into the market, and stocks fell on the opening on February 3. US Treasuries gained, with yields falling by about 10 basis points (10/100ths of 1%) on the US Ten Year Treasury, as a “flight to quality” ensued. Meaning, investors snapped up US Treasury Bonds, which are considered “risk-free” in the face of uncertainty. As we close in on the end of the first week of February stocks have stabilized as tariffs were delayed for at least 30 days.
As we look forward the greatest concern is that constant turmoil, uncertainty, and an utter inability to forecast future events, subject to 2AM Social Media Posts, make it difficult for businesses to plan. Without the ability to forecast revenues, expenses, and demand, due to rapidly changing conditions, and households uncertain whether jobs will remain plentiful, and incomes reliable (with sudden announcements of completely canceled Federal Spending) there is the risk that both businesses and households will become risk averse, stopping spending and hoarding cash. Not a good sign for the economy, or the markets.
Jan 1, 2025
Dec 2024 Market Commentary
No Santa Claus Rally materialized in December, as the Fed announced the likelihood that only two rate cuts would materialize in 2025, and the outlook became more sober. Stocks also struggled as valuations remain elevated. The Dow Jones Industrials had its longest losing streak since 1974, falling for eleven consecutive trading sessions by mid-month. Other major US and International Stock Indices fell by about three percentage points for the month, though 2024 witnessed strong gains, more than 20% for a second year in a row.
Sentiment in the bond market was even more negative, falling from near break-even territory in November to end the year down by -2.3%. Global fixed income declined even more precipitously in December, from a YTD gain of 5.0% in November plummeting to 0.2% at year’s end. Nonetheless, international fixed income outperformed US Bonds for the year, remaining ever so slightly in positive territory for 2024. Since mid-September the yield on the US 10 Year Treasury has increased from 3.62% to 4.58%, near last Spring’s peak of 4.71%, putting an end to hopes for lower borrowing costs, lower mortgages, and other outcomes that would strengthen the economy.
Stock gains for 2024 were highly concentrated among just a handful of stocks known as the “Magnificent Seven”, including Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla, as investors envisioned massive future rewards for AI Technology. As the year ended this enthusiasm may have run its course, at least in the short-term. Returns for the broader market were generally anemic or even negative. Casual investors seem not to recognize the concentrated risks, with just a handful of stocks making up nearly one-third of the S&P500 Market Capitalization.
The year to come remains difficult to forecast, as geopolitical developments take center stage with a new, and often unpredictable administration taking over, while the war in Ukraine may drag on and China maneuvers for political advantage in Asia and around the World. Meanwhile, the potential for sustained inflation, limited rate declines, and potentially larger US Deficits anticipated by Bond Market pundits leads to elevated bond yields and a slower economy. In general, the outlook is more cautious moving forward.
Peter Gaylord, CFA
Gaylord Wealth Management, LLC
Rocklin, CA