Insights + News + Advice

Insights + News + Advice

market update

Q1 2025 Market Update

Summary, Last Quarter:

The fourth quarter was marked by the presidential election and its aftermath. Donald Trump secured re-election, which, along with some renewed tariff rhetoric and a controversial interest rate cut by the Federal Reserve, shaped much of the economic conversation. Inflation ticked up slightly, and concerns about its persistence are becoming more prominent as the Fed lowers rates. Meanwhile, productivity and corporate profits showed solid results. The stock market responded positively to both the election outcome and the rate cuts, rallying strongly. Unemployment held steady, remaining near the Fed’s 4% target. Bond vigilantes (defined below) showed up, something we haven’t seen in some time.

Our Commentary:

The re-election of Donald Trump is expected to usher in policies including lower corporate tax rates, deregulation, stricter border controls, and potential tariffs. While reduced corporate taxes and deregulation could boost productivity, employment, and economic growth, they also carry the risk of fueling higher inflation. The potential implementation of tariffs is a significant unknown. It could be a strategic negotiation tactic, causing temporary market volatility, or it might materialize, which could slow GDP growth. If enacted, tariffs would likely add to inflation pressures, raising questions about the Federal Reserve’s decision to lower interest rates in November. In our view, this rate cut was unnecessary given current inflation levels. However, the Fed seems increasingly focused on concerns about the labor force.

Bond vigilantes are investors who respond to excessive government spending by driving up bond yields, typically through selling or refraining from buying government bonds. This reduction in demand increases yields. To understand their actions, it’s helpful to remember that bonds represent loans. When governments issue too much debt, the perceived risk of default rises, making these loans less attractive. This often prompts bond vigilantes—typically large institutions managing significant capital—to take action. These aren’t everyday bond investors but major players capable of influencing yields. In the fourth quarter, their impact was felt as yields rose, particularly in developed market economies. The U.S. wasn’t immune to these effects, but short-term U.S. bonds remained in favor.   

The U.S. occupies a unique position as the only developed nation with rising debt alongside a growing economy, a stable democratic system, and the status of being the world’s reserve currency. During periods of heightened volatility, investors tend to gravitate toward reserve currencies like the U.S. dollar. With the transition to a new presidential term and renewed geopolitical posturing, volatility is likely to increase.

Forward earnings—projections of future corporate profits—have been on the rise. This positive outlook is supported by gains in productivity and the prospect of lower corporate tax rates and deregulation. In contrast, developed market debt presents a less optimistic picture, largely due to the significant spending undertaken during the pandemic. Now, many nations face the challenge of managing this debt. One approach is to reduce the size of government, while another is to stimulate economic growth to outpace the debt burden. The “Trump 2.0” administration seems to be pursuing both strategies, aiming to lower corporate taxes and ease regulations. The key question, however, is how much volatility, and potential inflation, these policies might introduce.

Until next quarter,

Leelyn Smith Investment Committee

Content in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing involves risk including loss of principal.  No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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