It’s Still Stormy
I hope you are enjoying the summer months and enjoying activities with family and friends.
The second quarter began dismally with President Trump enacting several significant tariff policies in an effort to bring unfair trade partners to the negotiating table. The market reacted with a 14% intraday decline as measured by the NASDAQ Index, in the first week of the quarter. This was in addition to the 10.4% drop in the first quarter. But, during the quarter, some of the worrisome headlines had diminished and the markets raced back up.
During the second quarter of 2025, the S&P 500 Index gained 10.6%, the NASDAQ Index gained 17.7%, the Russell 2000 Growth Index gained 11.7%, and the iShares Barclays 7-10 yr. Treasury Bond ETF (IEF) gained 0.4%.[1]
The market rebounded immediately after the Trump administration relaxed its tariff plans. Then, the wheels of DOGE (Department of Government Efficiency) seemed to fall off and the government was back to its policy of spending and running large-scale deficits.
The takeaway from these actions is that market participants are going all in on headline news and not rigorously evaluating the timing, magnitude, and probability of news. This is like a court ruling on a murder case and concentrating on hearsay and ignoring the facts.
Market pricing trends toward the true economic and financial reality, which unfortunately is a moving target. The difficulty is that mentions of a new policy are rarely timely or come to fruition as they were originally proposed. Many investors get tripped up by not doing the work and not knowing if the market is reflecting reality.
The continuance of deficit spending is a key issue. In the short term, it is a stimulus to the markets since there is more money flowing through the economic system. In the long term, it is very dangerous since deficits need to be serviced and paid for.
Currently, according to the Peter G. Peterson Foundation, the US national debt is over $36 trillion which amounts to approximately $107,240 per person. Annual fiscal deficits add to this sum and in 2024, the deficit was $1.8 trillion.
Recently, Elon Musk correctly stated “Congress is making America bankrupt.” I believe him!
Current market prices seem to reflect a more favorable tariff situation, calmer geo-political tension, and less fear of inflation.
We are far from clear skies.
Initiations have been made, but we are clearly far away from cementing long-term trade relationships with our largest trading partners. Peace in the Middle East is not certain and may never be since it is where the East meets West. The U.S. deficit is out of control.
Even though the administration’s BBB (Big Beautiful Bill) is now law, it is watered down and not what it was proposed to be. The bill has benefits to many people, but it may not be able to accomplish the far reaching proposed economic goals it was touted on.
Today, Iran and China seem to be on their heels, but these societies are truly ancient and calculate and operate in the very long term. My estimation is that there will be stumbling blocks in both relations, not to mention Russia, which may lead to temporary market drops. Depending on the severity of the news, I’m a buyer.
A major key market input is interest rates, which have been kept stubbornly high due to uneven Federal Reserve (Fed) practices. This may lead to an economic growth scare which historically rattled the markets. In my opinion, the key metrics the Fed closely monitors, such as employment, inflation, GDP growth, consumer spending, and interest rates, collectively indicate that they are late in lowering interest rates.
What I see now:
- The market is impetuous. More time is needed to digest the nascent good news on tariffs, geo-political developments, and deficits.
- If a growth scare develops, this may put enough pressure on the Fed Chairman for Chairman Powel to act in a proper manner and reduce rates.
- I believe that investors will see a temporary market drop and have an opportunity to put more money to work.
- Dollar weakness is temporary.
- Yields climbing across markets will end soon and it may be time to lock-in bond or CD rates.
As always, I am excited to wake up and closely monitor new developments, to seize opportunities while keeping a keen eye on risk.
Very truly yours,
Martin L. Yokosawa
[1] These returns are price based and exclusive of dividend reinvestment. Return data provided by QUODD Financial, ETFreplay.com, and Yahoo Finance