2025: Looking Back
Equities:
2025 began with the S&P 500 continuing the strong uptrend from 2024. Suddenly, in early March, the S&P 500 gave up its gains on the year – the thinking was this was just another standard pullback in the market. But in early April – April 2nd – “Liberation Day” happened. Reciprocal tariff rates, much higher than anticipated, were instituted on almost every country around the world. Quickly the market was down -21% by April 7th – second fastest bear market in history. The next day, April 8th, the market was down by -15% on the year – the 4th worst yearly start in history. A large contingent of investors thought the economy was headed for a recession. An indication of fear, the Volatility Index (VIX) closed above 50, signaling extreme fear.
April 9th, the new punitive tariff rates were to begin – they never did. Instead, President Trump announced a 90-day pause on the higher planned tariff rates for all countries except China. The S&P rose +9.5% that day – the 3rd biggest one-day gain since 1950. The back and forth on tariffs continued for weeks and months. The market moved up and down based on the tariff news. As a result of this uncertainty, the term “TACO TRADE” – “Trump Always Chickens Out” became part of the nomenclature. As these weeks and months went on, the sell-offs seemed to become smaller. Investors concluded tariffs may not be enacted after all, and the S&P was back to all-time highs by the end of June. The S&P gained +22% in just 12 weeks. One of the fastest turnarounds in market history. In addition, the VIX, from April to June, decreased -64% – the biggest volatility crash ever!
From the S&P 500 bear market lows in April of 2025, it took less than 3 months to hit a new all-time high – the second quickest recovery for US stocks in the last 75 years.
Well then, this must be easy – or so everyone thinks! During bear markets investors can move out and in at the right times and with ease. Really? By the time the issues causing the decline are past, many of the best days and largest gains have passed. 2025 was no different.
Fixed Income/Bonds/US Federal Reserve (FED):
Almost all the major global central banks, except Japan and Brazil, cut their interest rates in 2025. The US Federal Reserve (FED), in addition to 100 basis points (1.00%) of rate cuts in 2024, lowered interest rates three times, another 75 basis points (0.75%), in 2025. Why did the FED lower rates?
The FED has a dual mandate: employment and maintaining price stability (inflation). The FED believed there was evidence of a weakening labor market. The unemployment rate had risen to 4.6% (highest since September 2021) and slowing job growth (10,000 per month – over the last 4 months was the fewest since the 2020 recession).
What about inflation? The FED seems to be overlooking this for now – US CPI (Consumer Price Index) averaging close to 4.0%/year since the beginning of 2020, nearly twice the FED’s 2.0% target. Was zeroing in on employment and not inflation misguided?
In short, the expectation among demographers is that all population growth in the next 4 years and almost all of it now, comes from immigration. Self-deportations and other types of deportations have seen immigration numbers decrease dramatically. Simplistically, are the number of jobs needed to keep people employed (and the numbers the FED looks at to determine this) giving off false signals now? Should inflation be their main concern? If so, should they be lowering interest rates? Interesting debate.
Anyway, the 4th worst beginning to a historical 2025 equity market ended with a 37% advance by year-end. This was one of the greatest market comebacks! With the administration’s ability to keep the stock market making new highs, and with stock market valuations at extremes, 2026 should be interesting.
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