Weekly Newsletter: May 26, 2025
Our hearts and prayers to the families who have suffered the greatest sacrifice of war. The pause to reflect is also a warranted when contemplating the markets and economy. In what was supposed to be a light week for economic data and a rest ahead of this weekend It turned into something much more. From a poor auction of the unusual 20-year treasury bond to the on-again tariffs that now target not only Europe but also one company (Apple). From the instigations of across-the-board tariffs to today, the markets are essentially unchanged, but so much has changed in the minds of investors. In addition to the tariff talk, the 1000-page tax bill moved to the Senate from a one-vote passage in the House. Instead of sporting a slimmer government spending package, like so many budgets before, it increases overall spending during a time of relative economic plenty. Many wonder what will happen when the inevitable economic storm passes over the US and spending increases to help during the next downturn. The shortened week will not be short on economic data, with the Fed’s favorite inflation report, (PCE) housing data, and consumer income/spending data.
The markets finished roughly 2.5% lower on the week based on the rhetoric that was once again amped up on tariffs after an agreed 90-day negotiating period. What may be surprising is that the decline was not steeper. It may be that investors realize that there is more smoke than substance from Trump’s posts on Truth Social. Investors are still sorting through the six-week whirlwind of activity. From a 20% decline from all-time highs to the April lows to a ferocious rally back to within 3% of those all-time highs over six weeks has been unprecedented in the speed of the decline and rally. However, the markets have seen plenty of instances of a 15+% decline followed by a rally toward prior highs. In all instances, the markets were higher six months later. There is always a first time. The geopolitical uncertainty surrounding this administration combined with high valuations leaves little room for errors. The coming months will be instructive too, as inflation, spending, and employment will all provide some light on the impact of tariffs. There have been some announcements for companies regarding price increases. How will consumers react? Will spending move to other parts of the economy? Or will consumers increase their savings and cut back on spending? Answers that the summer months should provide.
The freak-out over what was a “meh” auction of 20-year treasuries pushed interest rates higher and raised concerns about the US “selling” bonds to cover their debt. To be fair, this bond is not a “normal” bond that gets auctioned as the usual auctions are for short-dated bonds and 7, 10, and 30-year bonds. The coming week will be the 2, 5, and 7-year auctions that should provide a better picture of demand for US debt. The backup in yields is not just a US phenomenon, as Japan and European yields have been rising. Concerns about spending, debt service, and bond buying are not new as these concerns have been around for the better part of 40+ years. What remains the great unknown is where the point is that country debt (whether US, Japan, Europe, etc.) gets repudiated.
Much of the focus has been on the US and the technology sector specifically. Those bullish on tech point to the revenue growth of the sector and the promise of AI. Over the past year, revenue of the Magnificent 7, those most tied to AI, grew at just over 10%. This compares favorably to the general SP500 revenue growth of merely 5%. The flip side is that investors recognize the growth and have pushed the valuation of many tech companies to historically high levels. It could be argued that the opposite of technology is international/emerging markets, which are trading at/near historically low levels. Since the election and the beginning of tariff talks, international investing has worked very well. Beginning on election day, the international index is up over 10%, while the SP500 and growth stocks have returned less than 4%. Since the first of the year, the spread has been even wider in favor of international. It has been a long time since international investing has been competitive, but it could be that investors may enjoy a few very good years sending money overseas vs. keeping it in the US.
This shortened week is chock full of economic data. There may be more political news on tariffs to add to the mix.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.