Q2 2025 Outlook
- Alex Leonida, CFP®, CIMA®
- 4 minutes ago
- 3 min read
April 2025
Issue #6
Nobody wins in a trade war!
THE BIG 3
Tariffs Part Deux
The kidding around is pretty much over!
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Bonds
Current indicators are showing an increasing likelihood of rate cuts.
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Bear Markets
Bear markets happen slowly, then all at once.
Big Tariffs, I mean Huge
No trading partner is safe.
Tariffs were formally announced as the “American Liberation Day.” In classic Trump hyperbolic fashion, he succeeded in scaring global markets with his rhetoric. The magnitude and sweeping nature of the tariffs are far more aggressive than any economist expected. As such, there is an increasing likelihood of persistent stagflation (growth slowing and inflation accelerating). This brings a potential recession into play.
Ultimately, tariffs change the way trade is executed, goods are manufactured, who buys things, and how much gets bought. The US is, by a wide margin, the largest and wealthiest group of consumers on planet earth. For reference, the US consumes nearly 20% of global energy with only roughly 4% of the population. To that end, the world needs the American consumer more than the US needs international consumption. While the trade war may not be resolved quickly, it will be resolved at some point. Many of the economies with the stiffest tariffs (see above) have the most significant reliance on the US consumer/businesses. America trades at a deficit with nearly everyone, and that fact will drive bargaining power.
Bonds
The yield curve has decoupled from Fed policy. This is driven by a flight to quality and safety in both treasuries and investment-grade fixed income. Secondarily, it would appear that the bond market is now pricing in more than two Fed rate cuts this year. If that is the case, fixed income will remain a strong diversifier even when stocks begin to recover. This simply means that investors that resisted the urge to add risk to their portfolios are making up for years of bond underperformance in a very short period of time. One important thing to note is the fact that all bonds are not created equal. High yield junk bonds will NOT provide stability during periods of heightened volatility and policy uncertainty.
Bear Markets
Bear markets happen. In fact, they happen roughly every 5.5 years. They occur for a variety of reasons, but there are normally multiple factors at play. While the S&P 500 is not technically in a bear market, the Nasdaq, small cap, and midcap indices are all firmly in bear market territory. Our base case was not to see a bear market in 2025; however, the combination of dramatic government layoffs, a meaningful reduction in government spending, and tight monetary and fiscal policy were enough to create volatility on their own. Add a trade war to the mix, and you get a bear market.
Generally speaking, the speed at which a bear market develops also dictates the speed at which it is likely to recover. Good examples of this are the most recent bear markets during early 2020 (COVID) and 2022 (Ukraine + inflation). While many folks will scream from the rooftops, “this time is different,” economic history normally repeats itself. History tells us that bear markets average about 9 months in length and take about 2 years to set new highs. The number is higher if you include the tech bubble and financial crisis as one recovery period. Conceptually, if the tariff shock is short lived, the recovery will be swift. The world needs the American consumer, so we suspect tariffs will be resolved well before the end of the year.
The Bottom Line
Diversification is the key to full market cycle stability. Staying the course and remaining invested is the only way to recover from bear markets, and picking a bottom is nearly impossible. Stocks have always historically recovered, and there is no reason to suggest that this time will be any different. How long it will take for a full recovery is anyone’s guess, but taking a long-term view is typically rewarded when it comes to the stock market.
Any opinions are those of Alexander Leonida. The information contained in this document does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but CFG does not guarantee that the foregoing material is accurate or complete. This newsletter: (a) is not an official transaction confirmation or account statement; (b) is not an offer, solicitation, or recommendation to transact in any security; and (c) may not be retransmitted to, or used by, any other party. Investment products are: Not deposits. Not FDIC or NCUA insured. Not guaranteed by the financial institution. Subject to risk. May lose value.