Market Update for May 22, 2025

Three positive thoughts and three current frustrations.  Let’s leave on a positive note, so frustrations first:

1. Tariffs are causing confusion.  I will again go on record saying tariffs as a long-term tool to onshore manufacturing is stupid/useless/foolhardy/fraught with problems (pick your favorite), and tariffs as Trump’s new “art of the deal” negotiation tactic risks causing unnecessary harm.  Non-China tariffs are due to increase again in about 6 weeks’ time, and China tariffs around 4 weeks later.  It is anyone’s guess if those will be eliminated, delayed again or allowed to proceed.  Trump seems to see “deficits” as a negative - even though they need not be - and it is no surprise to me that our first “trade deal” was struck with the UK - a country with whom we have a very small net trade imbalance, i.e., minimal deficit.  Large tariffs are inflationary by their nature, and the overhang and confusion of said tariffs causes Jerome Powell and the Federal Reserve to hesitate on lowering interest rates, leading to point #2…
2. Interest rates remain high.  As I write this on 5/22/25, the 5-year note is 4.10%, the 10-year bond 4.55%, and the 30-year Treasury at 5.06%.  This is hurting commercial real estate and bond performance, two asset classes that my clients have exposure to.  This correlates to mortgage rates remaining elevated compared to recent norms, with the average 30-year now back to 6.86%.  Millions of would-be home buyers are unable to afford the mortgage at these rates, forcing them to pay increasing rents.  Debt that the U.S. must refinance multiple times weekly is done at higher interest rates, hurting our deficit.  There are higher CD and fixed annuity rates for savers and investors, however, so that is one silver lining within these negatives.
3. Business and consumer confidence has been shaken.  I have never been an alarmist about a technical recession - I have mentioned many times that a short-lived/shallow recession is far preferable to mundane growth for many years.  Trump has essentially admitted that we are in a “transitionary period” and that growth will likely decline before jumpstarting future growth prospects to a much higher level. The pain part looks to be real - it remains to be seen (and I have my doubts) about the future positives.

Here are some green shoots, though:

1. Stocks are substantially off the lows.  The S&P 500’s highest year-to-date (and all-time) high was reached February 19, 2025, at 6,144.  Year-to-date low thus far is 4,983, April 8, 2025, a stunning 19% drop in just 33 trading sessions.  Thirty trading days later, as of last night’s close we reached 5,845, a move of 17% off the April 8th low, and bringing the broad market back to nearly level for the year-to-date.  A great deal of volatility, and yet we find ourselves at similar levels to mid-October 2024.  There are clearly animal spirits interested in buying into this stock market, despite the risks.  In summation, the market has bounced around a lot, but there has neither been traction higher or lower over the past ~7 months.  
   1. Stepping further back, the intraday high on 12/27/2021 was within 1% of the intraday low on 4/7/2025- for those specific near-40-months, the broad U.S. market was again nearly flat.  These are very specific dates - about as bearish sounding as I can make the market sound - and it is precisely what I would quote if I was finding support for “the stock market isn’t very strong.”  Conversely, from the October 2023 low to today, the same market is UP over 41%.  That sounds decidedly bullish.  For these reasons I try to AVOID this type of analysis, as the numbers and dates can be usually modified to support whatever thesis one already holds - it is very hard to remain objective.
2. Artificial Intelligence is changing our world…and quickly.  As my clients largely know, I am not on the cutting edge of technology.  However, even I am now using AI to help me with my meeting notes.  They are more robust and detailed than before and take less time for me and my staff to formulate and process.  Anecdotally, I have a friend who works in tech who told me “AI can do anything and everything that doesn’t require hands,” and that due to how fast AI is improving “I think most people’s jobs…will look vastly different in a few years.  Maybe in a year.”  I continue to pay close attention to companies that are at the forefront of AI - massive companies including but not limited to NVDA, GOOG, AMZN, and MSFT- but also some smaller AI-related stocks such as PLTR, VRT, SOUN, AI, and RXRX, to name but a few (this is not meant as a suggestion to buy these names).  Can AI help me pick investments and create investment models for clients better than I do manually/now?  That is the next use-case I am hopeful of.
3. The “Big, Beautiful Bill.”  Extending the 2017 tax-cuts (some would say “changes” is fairer than “cuts,” but I will be kind and use cuts) is a positive today, because if they expire as they are earmarked to do at the end of 2025, it would feel today like a tax increase.  The House of Representatives just narrowly approved their version of the bill, and soon the Senate is looking to approve their own somewhat different bill, where there will then be a reconciliation process between the two bills to merge them into one.  This is a confusing, detail-laden process, and as usual, the devil is in the details.  It appears that cuts to Medicaid are on the table, whereas Medicare and Social Security cuts are not being considered.  State and local tax deductions - uncapped before 2017 but capped at $10,000 since that last bill - are seeing a cap increase to around $40,000, which will substantially offset federal taxes owed even for moderate income earners who itemize.  There is no balanced budget - by almost any take the new bill will add to the national debt, and perhaps dramatically, over the coming decade.  I have mixed emotions about what I am hearing, but getting something done is likely better than nothing, so I will view this bill’s ultimate passage as a modest positive.  Both sides of the aisle spend elaborately and borderline recklessly - this doesn’t seem to be changing any time soon, despite a $36.2T deficit.