Dare I utter the word “recession”? I think the US economy remains too strong for that, at least for the time being, but it is clear now that a growing number of investors are placing bets on an economic slowdown in the U.S. How else can you explain why the yield on the 10-year US Treasury has declined 55bps in the last seven weeks (since Jan 13)? And how about the U.S. stock market, which is weakening in spite of a record strong earnings season? The S&P 500 was down 1% last week, and is now clinging on to a modest gain of 1.2% YtD, significantly trailing the returns of equity indices in the U.K. and Europe. Even the “it’s going up forever” stalwart cryptocurrency Bitcoin can no longer defy gravity, with the benchmark cryptocurrency getting hammered last week. Where are the buy-the-dip investors that normally step in? My guess is that the last-in of the really dumb money has now been burned on all the usual high flying suspects in both the stock and crypto markets, and professional investors behind this cadre of retail investors know very well not to step in front of a train coming right towards them at 100mph as market volatility increases.
Mr Biden’s administration is now in the rear view mirror, so the buck stops with Mr Trump. Yes, he rather amusingly continues to say that he inherited “the worst economy ever”, but this is a false narrative, which you can explore yourself in an article I wrote mid-week on EMC entitled “’Worst Economy Ever?’ Not even close!”. Unfortunately for investors, President Trump’s bizarre and erratic fiscal policies – including on again-off-again tariff threats, the deportation of illegal workers in the U.S., and the promise of deficit-increasing tax cuts – are out of synch with what investors want to see, which is stability and responsible fiscal management. At the moment, we are getting the opposite, and it is not setting well at all with risk investors.
What should an investor do in this environment? So far in 2025, the prior years’ laggards have led the pack, finally (it seems) illustrating the benefits of geographic and asset portfolio diversification. With yields coming in at the intermediate- and long-end of the UST curve, bond investors who are long duration have been rewarded. Non-US equities have also been strong this year, as investors that have diversified into less expensive foreign stock markets – especially in Europe and the UK – have reaped benefits vis-à-vis US equities. The reality is that equity markets in Europe (and even China) still look relatively cheap, and they do not suffer from erratic government leadership (at least compared to the U.S.), and have economies that – although have performed below trend in terms of growth the last few years – should be poised to recover. I would never bet big against the U.S. on a long-term basis because history has proven this to be a mistake time and time again. Also, I have some faith that Mr Trump – who constantly changes his mind but listens to markets and his approval ratings – will recognise the lashing he is getting from investors and settle down. But there is certainly no guarantee.
MARKETS LAST WEEK
As I alluded to already, this year has been much different than 2023 and 2024. The best performing indices this year have not been in the U.S., but rather in the U.K. (FTSE 100, up 7.8% YtD) and Europe (Stoxx 600 up 9.8% YtD). Even Japan has unravelled this year, taking the prize for the worst performing equity index (Nikkei 225 down 6.9% YtD). Chinese equities finally managed to stage a modest recovery through mid-February, but have now been taken out at the knees by the threat of higher U.S. tariffs. In the U.S. stock market, the DJIA has been the best performing index as investors have moved into large cap companies (DJIA +3.0% YtD) and out of tech, while the NASDAQ has been the worst performing index (-2.4%).
For some reason – probably because of month-end options expirations – US stocks took off like rockets in the last 25 minutes of Friday’s session, salvaging what could have been a much worse week. The S&P 500 swung 117 points on Friday, with half of this occurring in the last 25 minutes of the session when the S&P 500 rose an astonishing 60 points to register a gain for the day. Not surprisingly, the VIX (measure of US stock market volatility) soared to its highest level on Friday since mid-December; the VIX reached an intra-day high 22.4 on Friday before settling at 19.63. Aside from the shift in global equity and sector returns, investors in long-dated U.S. Treasuries have done very well this year, too, with the total return on the 20+ year UST bond index up a sharp 4.9% YtD (compared to a decline in 2024 of 7.8%). Gold has also proven to be a good place to have some asset allocation, especially as investors have sought safe havens as market risk has increased. Gold was down 2.8% last week but is up 8.6% YtD, not bad since it is following gains of 28% in 2024 and 13.3% in 2023.
At the end of this article are comprehensive tables containing performance metrics for the indices and assets tracked by EMC, which you can access here.
WHAT MATTERED LAST WEEK
US PCE for January (here) was in line with consensus expectations, providing investors – and certainly the Fed – with some relief regarding the path of inflation. If US economic growth does in fact weaken as markets are suggesting, improving inflation figures might open the door to the Federal Reserve becoming more accommodative faster. However, the great unknown relates to potential supply-side shocks from the likes of blanket tariffs and the deportation of illegal immigrants, both of which are likely to lead to inflationary pressures. We will get to see this play out in real time should the current administration stick to its guns. For the record, the CME FedWatch Tool is now projecting two 25bps reductions in the Fed Funds rate this year, the first in June and the second in September.
Inflation came in lower than expected in Japan for February and showed some improvement over January. Nonetheless, inflation remains above target, leaving the door open for further tightening by the Bank of Japan. The Yen was slightly lower on the week, with the effects of potentially tighter monetary policy being felt more with Japanese equities. Following two straight years of double digit gains in Japanese stocks, the Nikkei 225 is the worst-performing stock market in 2025 of the ones tracked by EMC.
German CPI in February (here) is expected to be 2.3%/annum headline (flat to January) and 2.6% core (improvement over January), largely in line with expectations. Preliminary Eurozone CPI for February will be released on Monday. This sets the stage for the ECB to lower its policy rates again at its monetary policy meeting this coming Wednesday, although what might happen in future meetings is difficult to call until more data arrives.
MY PORTFOLIO
I added a scrap to my NVDA holdings after earnings, which I thought were decent, when the stock fell sharply. I still find the stock relatively fairly valued compared to other tech names, especially when compared to some of the names that remain significantly over-valued. I also had shares called on Friday in which I had open covered call positions, including BRK.B (largest holding at Dec 31, 2024) and V. I love both companies, but their shares are running so much that I am not overly concerned about selling into strength, especially considering the rather wobbly and uncertain market conditions. As far as Berkshire specifically, I still find it difficult to justify the run in the company’s stock last week post-earnings, which were decent but far from exceptional. Moreover, the fact that the company is no longer buying back its own stock sends a strong message indirectly from Mr Buffet on his perception of Berkshire’s current valuation. I had several other open covered call positions expire on Friday, and have others running, including on CRWD (earnings mid-next), V (more), AAPL, SBUX, and BRK.B (more).
WHAT’S AHEAD
Economic focus: Eurozone preliminary CPI for Feb to be released on Monday; US ISM manufacturing and ISM services data for Feb will be released on Mon and Wed, respectively; the February US jobs report will be released on Friday; and China CPI for Feb will be released.
Tariffs: Mr Trump plans to move forward with additional tariffs on China (10%) starting Tuesday (Mar 4), and the expiration of the deferral of 25% blanket tariffs on Canada and Mexico also expires on Tuesday, meaning the 25% tariffs on both countries will be put in place then. The question is will Mr Trump blink again by gaining concessions from one or both countries?
Upcoming central bank meetings:
ECB: Mar 5-6 (expect 25bps reduction in policy rates)
Bank of Japan: Mar 18-19
FOMC: Mar 18-19, including revised Summary of Economic Projections
Bank of England: Mar 20
MARKET TABLES
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