Market Update

Dear Friends & Clients,

We hope you’re doing well and looking forward to summer plans.

After a brief respite from April’s turbulence, markets are back to reflecting the investor anxiety of an uncertain policy environment. While trade has temporarily taken a backseat to deficit spending worries, we anticipate these two issues being a theme for the summer.

As always, don’t hesitate to reach out!
-Didier, Eric, Shirley, Jaci & Tom

“‘How did you go bankrupt?’ Bill asked. ‘Two ways,’ Mike said. ‘Gradually and then suddenly.’”
-The Sun Also Rises (Hemingway)

After a remarkable 20% recovery from the April lows, the budget bill making its way through congress has focused market attention on the next policy battle: deficit spending. In its current form, the bill would add substantially to the national debt over the next 10 years¹. The U.S. budget deficit has already exceeded $1 trillion in the first 7 months of this fiscal year (10/24 through 4/25)². For the 2025 fiscal year, interest payments are the second biggest line item, behind only Social Security, and ahead of Medicare and National Defense³. For perspective, interest payments alone this year are projected to be more than double the size of the 2008 economic bailouts⁴.

Oddly, we have been here before. Due to the extremely high interest rates of the 70s and 80s, interest costs on the national debt as a percentage of GDP were slightly higher in 1991^3,6. Reining in spending isn’t something politicians typically do voluntarily. However, the strain these high rates put on the federal budget caused investors to demand even higher interest rates for continuing to finance the US via treasury auctions. As we’ve seen time after time, nobody wins a game of chicken with the bond market. Fortunately, given the robust economic growth of the 1990s, it’s evident that the corrective action needed to resolve the last federal budget crisis didn’t cast much of an economic shadow. In fact, GDP growth gained steam after the budget was more than balanced and surpluses were used to actually pay down national debt⁵.

The good news about a policy crisis is that there is time to course correct before it becomes a fundamental economic crisis. Policy crises typically manifest in financial markets as brief, but violent events, whereas fundamental economic issues are more protracted processes and frequently presage recessions. As we went over in our last market update, there are two main levers that influence the trajectory of the global economy: fiscal policy and monetary policy. The Federal reserve has done a lot to “normalize” monetary after nearly 15 years of a 0% interest rate environment. It’s now time for lawmakers to normalize fiscal policy in recognition of higher borrowing costs.

Investors never really know exactly when a country’s debt issues will become a market problem, and it could very well be that after more dilution in the Senate, this issue recedes behind other market concerns, but this is likely not the last we’ve seen of it. Fortunately, after a long stretch of relative underperformance, high quality bonds and international exposure have gone a long way this year in insulating portfolios from the extreme policy swings that have buffeted US markets. In short, diversification is finally reminding investors of its utility.

Speaking of those other market considerations, for those who want more detail, below is what has been top of mind for us:

• US Labor Market: with nearly 70% of US GDP coming directly from private consumption, the health of the consumer is arguably the single most important economic factor. So long as unemployment stays relatively low, the recent terrible consumer sentiment surveys don’t translate into less spending⁸. While the labor market is showing signs of cooling in the form of slowing wage growth and fewer people quitting their jobs in search of greener pastures, with the current unemployment rate at 4.2%, there is a decent cushion before we could see spending data meaningfully deteriorate⁹.

• Mean Reversion: after consistently underperforming the US since 2008, developed international markets are getting renewed investor attention. In our view, this is mostly due to US stocks currently trading at around a 50% premium to their foreign counterparts¹⁰. We don’t necessarily see foreign companies outperforming US companies, but year-to-date we’ve seen earnings growth just help justify current US stock prices whereas earnings growth overseas has pushed depressed prices higher. It has been difficult maintaining an international sleeve over the past 15 years, but diversification is finally starting to work again.

• Policy: While trade concerns have not gone away, there appears to be good engagement around renegotiating trade deals and little appetite to revive the market chaos of a potential full scale trade war. There’s also a growing desire to focus on stimulative domestic policies in the back half of the year as DC begins to focus on the 2026 mid-terms.

1. https://www.barrons.com/articles/20-year-treasury-bond-auction-bba9d889
2. https://www.cbo.gov/publication/61301
3. https://www.pgpf.org/programs-and-projects/fiscal-policy/monthly-interest-tracker-national-debt/
4. https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost
5. https://www.macrotrends.net/global-metrics/countries/usa/united-states/gdp-growth-rate
6. Great resource for economic data: https://fred.stlouisfed.org/series/FYOIGDA188S
7. https://www.ceicdata.com/en/indicator/united-states/private-consumption--of-nominal-gdp#:~:text=United%20States%20Private%20Consumption%20accounted,an%20average%20share%20of%2063.5%20%25
8. https://www.federalreserve.gov/econres/notes/feds-notes/tracking-consumer-sentiment-versus-how-consumers-are-doing-based-on-verified-retail-purchases-20250424.html
9. https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
10. https://privatebank.jpmorgan.com/latam/en/insights/markets-and-investing/ideas-and-insights/are-you-ready-to-embrace-the-potential-of-global-equities