Tag Archives: Investment Outlook

Mid-2025 Market Update: Navigating Volatility and Looking Ahead

The first half of 2025 proved to be quite a ride, marked by significant market volatility, including a sharp decline of over 10% in early April. A constant stream of unsettling headlines contributed to investor anxiety:

  • Recession predictions intensified, fueled by various economic indicators and expert analyses.
  • The risk of tariff-induced stagflation emerged as a key concern, with rising import costs potentially leading to slower growth and higher inflation.
  • Expectations for interest rate cuts diminished, as the Federal Reserve signaled a more cautious approach to monetary policy, emphasizing data dependency.
  • A notable public dispute between the President and the Federal Reserve added to policy uncertainty, creating headlines about central bank independence.
  • Geopolitical tensions escalated with the war between Iran and Israel, contributing to global instability and impacting energy markets.
  • Aggressive trade policies, including the implementation of 145% Chinese tariffs, significantly disrupted trade flows and global supply chains. These tariffs were a major factor in the 0.5% contraction of US GDP in Q1 2025¹, primarily due to a surge in imports as businesses rushed to stockpile goods before higher levies took effect, and a decrease in government spending. While imports are subtracted in GDP calculations, the rush to import indicates a proactive, albeit costly, maneuver by businesses to manage tariff impacts.

The President’s negotiating style, characterized by threatening “crazy action” to extract concessions from trade partners, has certainly weighed on investor sentiment and consumer confidence. While these metrics initially plunged, they have since shown some signs of recovery as a temporary de-escalation of tariffs between the US and China was announced in May, with US tariffs on Chinese goods reportedly dropping from 145% to 30% for a 90-day period². Markets, despite the rhetoric, appear to be betting that the President will ultimately avoid actions that cause serious damage to the economy.

Looking further ahead

The Road Ahead: The “Big Beautiful Bill” and the Bond Market

As we move into the second half of 2025, markets and interest rates will likely be heavily influenced by the proposed Big Beautiful Bill (H.R.1 – One Big Beautiful Bill Act) – the budget reconciliation bill currently making its way through the 119th United States Congress. The House of Representatives passed its version on May 22, 2025³. The Senate just passed their version today. Now both houses of Congress with go back and forth to reconcile differences.

As it stands, this bill, in its various forms, is projected to increase the national debt significantly. The Congressional Budget Office (CBO) has estimated that the House-passed version of H.R.1 would increase deficits by $2.8 trillion over the 2025-2034 period (including interest costs related to the additional debt) ⁵. Key provisions that could impact spending and the deficit include the extension of major provisions of the 2017 Tax Cuts and Jobs Act, increased defense spending, and proposed changes to programs like the Supplemental Nutrition Assistance Program (SNAP) and Medicaid⁶.

While the President continues to “jawbone” the Fed to lower interest rates, it’s crucial to remember that the Federal Reserve primarily controls short-term rates. The bond market, on the other hand, holds significant sway over longer-term rates. If the bond market starts to “sniff out” inflation due to increased government spending and a widening deficit, we could see longer-term rates – which are critical for driving economic development – begin to climb.

The question of when our ability to finance this increasing deficit will become an imminent problem is one that many have debated for years. However, the current trajectory suggests it bears close watching. I will be watching the bond market for clues as we navigate the remainder of the year.

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This information is for general purposes only and should not be considered investment advice. Investing involves risk, including possible loss of principle.

Footnotes:

¹ U.S. Bureau of Economic Analysis (BEA). Gross Domestic Product, 1st Quarter 2025 (Third Estimate). Released June 26, 2025. https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-third-estimate-gdp-industry-and-corporate-profits

² Raymond James. “How does the US-China trade truce impact our market and economic views?” May 14, 2025. https://www.raymondjames.com/bvfs/resources/2025/05/14/how-does-the-us-china-trade-truce-impact-our-market-and-economic-views (Note: The KBOI article also confirms the truce, but Raymond James gives more detail on the tariff reduction percentage)

³ Congress.gov. H.R.1 – 119th Congress (2025-2026): One Big Beautiful Bill Act. https://www.congress.gov/bill/119th-congress/house-bill/1

⁴ Wikipedia. One Big Beautiful Bill Act. (Provides information on the Senate goal for passage). https://en.wikipedia.org/wiki/One_Big_Beautiful_Bill_Act (Also corroborated by news reports like AP and Club for Growth).

⁵ Congressional Budget Office (CBO). H.R. 1, One Big Beautiful Bill Act (Dynamic Estimate). Released June 18, 2025. https://www.cbo.gov/publication/61486

⁶ Committee for a Responsible Federal Budget. “Breaking Down the One Big Beautiful Bill.” June 4, 2025. https://www.crfb.org/blogs/breaking-down-one-big-beautiful-bill (Provides a detailed breakdown of provisions and their fiscal impact). Also, Wikipedia page on the Act (Source 4) lists key provisions.

Patience

In my market outlook a year ago on January 3, 2022, I said, “I think a 20% correction would be reasonable… A 20% correction is not fun, but it is to be expected.” I’m not trying to say I told you so, but we need to maintain perspective after a very ugly year. Bonds went down too.

What now? Coming into 2022, the stock market looked about 7% overvalued. Now, it appears to be about 16% undervalued relative to Morningstar’s fair market value index. Since the end of 2010, only about 5% of the time does the market appear cheaper by this measure.

The broad landscape for investors is much healthier than it was a year ago. Valuations have come down. Interest rates are rewarding creditors for taking risk. Things are getting back to normal, and that’s good.

It might take another few quarters to see results, but the 2022 headwinds should turn into tailwinds later in 2023. The issues include slower economic growth, tightening monetary policy, hot inflation, and rising long-term interest rates. According to most projections, these issues should begin to resolve by the middle of this year.

Geopolitical risks around China, Russia, North Korea, and perhaps Iran, remain a threat to western civilization.

Heightened uncertainty makes the stock market go down and that creates an opportunity for long-term investors.

Investing involves risk, including loss of principal. Past performance is not indicative of future performance.

Halftime 2020, at Last!

As I suggested last quarter, the market has responded positively to a better understanding of Covid-19 and how to treat it. Political polarization, on the other hand, is likely to only increase into the election this fall. Social unrest is a problem, but rioting has given way to more rational discussions of legitimate issues.

 Despite the upheaval, the S&P 500 is only -4.04% YTD, and that is from a level that might be considered 5% overvalued by the Morningstar indicator.

In terms of the Morningstar market valuation indicator, the market ranged from 78% of fair value on April 1, to 5% overvalued on June 8. We finished the quarter 1% undervalued. Recovery has been driven by Government stimulus, business reopening, progress in controlling the virus, and hope for a vaccine. As we open the 3rd quarter, only the Government stimulus remains as a tailwind.

Near term, the market does not seem to have a lot of upside until we have a Covid-19 vaccine. The market anticipates a vaccine by early 2021. Although the market may pop on headline vaccine news, a development that could cause a sustainable rally is likely to me months off. Beyond that, we need to reckon with the 600-pound gorilla at the end of the vaccine tunnel: the election. While most administrations take more credit than they deserve regarding market movements, the current polarization could have a major adverse impact if the Democrats win both the Presidency and the Senate, opening the door to a progressive tax, spending, and anti-business policy in general.

So which direction do I think the market will move next? Last quarter I suggested, “we should see better than average returns in the not-too-distant future.” Now, however, I am less inclined to speculate about the short-term given the range of possibilities and the lack of near-term earnings visibility. Longer-term, the trend is still up. Earnings are almost certain to improve as business and employment normalize post-pandemic. The real question surrounds the rate of growth.