Market Update: Moving Targets

The Trump 2.0 administration is less focused on the stock market than the first term. Back then, the President said the four-year term should be measured by how well stocks do – which provided a tailwind to the market.

It seems the tune is changing this time. On two separate occasions this past week, President Trump said the economy is in “a period of transition” and warned Americans to expect “a little disturbance.” Social media posts implied he is not concerned about the recent market volatility.

This past week, Treasury Secretary Scott Bessent said there is no “Trump put” on the stock market – meaning, there is no level where the President will change course on his rhetoric. This is a change from January when tariffs on Mexico and Canada were delayed a month as equity prices fell.

It seems this administration has a different focus – and that is on the bond market. Specifically, they are pointing at the yield on 10-year Treasuries. This makes sense since the budget deficit is $2 trillion. Of this, $1.2 trillion is interest expense on the national debt, which will be increasing to $1.5 trillion as the debt is refinanced at higher interest rates. One of Bessent’s goals is to get the deficit to 3% by 2028. Today it is at 7%.

Paying the debt is not a problem (if you supply your own currency, it is impossible to run out of it). The problem is inflation. Deficits create inflation, and this can become entrenched in consumer’s minds. In turn, this keeps inflation higher, and the loop continues. The inflation that began in 2021 is still above the Fed’s 2% target and remains a concern for consumers.

In addition, bond market yields may be the ultimate goal of the cost cutting of the “Department of Government Efficiency.” Elon Musk said last month, “The bond markets do not currently reflect the savings that I’m confident we can achieve. If you’re shorting bonds, I think you’re on the wrong side of the bet.”

With the S&P 500 Index falling 10% from its highs, where do markets stand?

Prior highs like those seen in July and August tend to be where traders may look to dip their toe back into markets. There seems to be some indiscriminate selling as hedge fund strategies are forced out of stock positions.

The question we all want to know is, “what’s next?” Of course, no one has a crystal ball. But we can look at other markets to see how they are responding.

Generally, if the US economy catches a cold, the rest of the world gets the flu. Fortunately, foreign markets are shrugging off the concerns so far. Europe is opening up its purse strings for more defense spending, nearly $1 trillion from Germany, which pushed up stock prices in its financial and defense industries. Emerging markets are positive on the year as well. Bonds in the US are helping portfolios, up nearly 3% on the Aggregate Bond Index.

Credit markets are weaker, though high yield has not hit the target spread level that begins to price in concern (at over 4%). Meaning, spreads still have room to widen further from here.

Since the year 2000, 16 of the last 25 calendar years had intra-year price declines of 10%. Yet, 19 of those 25 years ended with positive total returns for the S&P 500 Index.

In times of heightened market volatility, it’s important to remain focused on long-term strategies and not make reactive decisions based on short-term fluctuations. While market shifts can be unsettling, our approach remains focused on maintaining diversified and well-balanced portfolios that may weather these types of challenges.

Seeing the future is impossible. Planning for the inevitable range of outcomes is not. And planning is what we do around market targets. We are ready to respond to a variety of scenarios to help our clients’ financial plans.

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