Week of April 21, 2025

Key Points for the Week

• After the best week in more than a year, stocks gave back some of the gains.
• The contradictory messages from the White House have created uncertainty for the financial markets. Financial markets hate uncertainty.
• Sentiment is extreme, as fear is rampant. Over-the-top negativity could become a catalyst for gains on any resolution to the tariff regime.
• The best and the worst days for the stock market tend to occur close to each other.
• Fed Chair Jerome Powell gave a speech that strongly implied that Fed currently sees fighting inflation as a higher priority than maximizing employment.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

When investor preferences shift and money flows from one sector, industry, investment style or geographic region into another, it is called a market rotation.

For years, stock markets in the United States have outperformed stock markets elsewhere.

“The outperformance is attributed to U.S. exceptionalism fueled by a strong culture of innovation and entrepreneurship; more flexible labor markets; higher productivity; stronger consumer consumption driving demand for goods and services; a more favorable regulatory environment; lower corporate taxes; stronger intellectual property rights; and more open markets and trade policy.”

Larry Swedroe of Morningstar.

One consequence of U.S. outperformance is that investors outside of the United States own a lot of U.S. stocks, about $18.4 trillion, reported Tracy Alloway and Joe Weisenthal of Bloomberg. The percent of European investors’ total equity portfolios invested in U.S. stocks has more than tripled since 2011, in part due to strong performance in the US stock market.

Now, Europe’s financial markets are outperforming those in the United States.

“Across assets of all stripes, the Old Continent is collectively trouncing America in a way that has rarely been seen before…German bonds last week beat Treasuries by the most ever. And while European shares have been knocked by the trade war, they are turning out to be far more resilient than American ones.”

Alice Gledhill, Abhinav Ramnarayan, and Julien Ponthus, Bloomberg

Over the last two months, global investors have backed away from United States markets. Bank of America’s monthly global fund manager survey found that asset managers have reduced U.S. allocations by more than half since February.

“A majority think a trade war that triggers global recession is the biggest risk for markets.”

Reuters

The recent geographic market rotation was a reminder of the importance of diversification. While diversification will not prevent losses, it can help investors effectively manage risk. Investors who held a geographical diversified portfolio may have fared better this year than those who invested only in the United States.

Last week, which was shortened by a holiday, major U.S. stock indices moved lower, reported Teresa Rivas of Barron’s. Yields on U.S. Treasuries were mixed over the week.

This Week in the Markets

After the S&P 500 gained nearly 6% two weeks ago, there was some well-deserved giveback last week, as stocks fell 1.5%, mainly thanks to a huge drop on Wednesday after hawkish comments from Jerome Powell (more on that below).

As we noted last week, stocks are trying to carve out a potential low, but risks are clearly still high. The potential of a trade war and a Federal Reserve (Fed) caught between inflation and a recession, have increased uncertainty for the financial markets. One potential positive is market breadth has held up quite well in the face of the near-bear market. The S&P 500’s advance/decline line is a cumulative tally of how many stocks advance and decline each day and it can give clues under the surface for how things are really doing. As the chart below shows, the S&P 500’s advance/decline line has held up well above the early 2025 lows, whereas price for the S&P 500 has broken beneath those levels, suggesting there is potential strength under the surface. Additionally, the S&P 500 found support just beneath the 5,000 level, which was also the lows last April 2024.

Sentiment Is Extreme

In many cases, sentiment is at extremely low levels, which could be positive from a contrarian point of view. Remember, once everyone is bearish the sellers may very well have exhausted themselves and a major low can form. This phenomena is sometimes referred to as capitulation.

The recently released Bank of America Global Fund Manager Survey showed a record number of participants who intend to cut US exposure. The survey also showed the largest two-month jump in cash since April 2020 and the 4th highest recession expectations ever. Given this survey looks at managers who manage actual portfolios, this is a very solid potential contrarian indicator.

Additionally, the National Association of Active Investment Managers (NAAIM) Exposure Index came in at its lowest level in 17 months, suggesting RIAs are finally tossing in the towel as well. Lastly, The Economist last October had a cover with $100 bills shooting into outer space with the title “The Envy of the World,” as everyone was bullish the US back then. Well, last week they had a cover discussing what could happen should there be a US dollar crisis. Just as sentiment was over the top on the US in late 2024, increasing the odds of potential trouble, now we are seeing the exact opposite backdrop.

The Best and Worst Days Happen Near Each Other

The best and the worst days tend to happen very close to each other. In fact, on Thursday, April 10 and Friday, April 11, the S&P 500 fell more than 10% for one of the worst two-day returns in history. Many investors could not take it and after that historic selling decided to get out of stocks early that next week. Sure enough, a historic jump was right around the corner, with now one of the best two-day rallies ever. As the chart below shows, the best two-day rallies and declines tend to happen near each other, with the worst days usually happening first, often followed by a huge rebound. This is another reminder that volatility is the price we pay to invest, and if you want to experience the big rallies, you will have to withstand the sell-offs.

The Federal Reserve

Federal Reserve Chair Jerome Powell gave us the most detailed description of how the Fed is thinking about policy in the face of massive tariffs in a speech at the Economic Club of Chicago on Wednesday, April 16. Afterward Powell participated in a Q&A, with the former head of India’s Central Bank and University of Chicago professor, Raghuram Rajan. Rajan asked insightful questions, drawing out more of Powell’s thinking than anything we have seen or read in the recent past.

Powell’s prepared remarks started off by saying the economy is strong, including labor markets and the inflation picture. He emphasized that the labor market is in a solid place, highlighting some key points:

• Job growth has slowed, but lower layoffs and lower labor force growth has kept the unemployment rate low.
• Wage growth has moderated while outpacing inflation.
• The labor market is not a source of inflationary pressure.

Ultimately, the last bullet is what is important because it tells you that all else equal, the Fed should be cutting interest rates now. There is no point keeping rates “meaningfully restrictive” (their own description) when higher rates tend to push inflation lower by lowering demand, which creates more unemployment and less income.

Moreover, the inflation data coming out has also been positive, even though it is still running a bit above 2%. Core Personal Consumption Expenditures (PCE), which is the Fed’s preferred inflation metric, is expected to rise just around 0.1% in March and clock in at 2.6% year over year. (March data will be released on April 30). That would be the slowest pace since March 2021. The core CPI (Consumer Price Index) metric was soft in March, rising just 0.06%, and is up 2.8% year over year, also the slowest pace since March 2021.

Powell noted how the new administration’s policy has completely upended their picture of the economy as we move forward, including policies around 1) trade, 2) immigration, 3) fiscal policy (taxes), and 4) regulation.

The level of tariffs has been much higher than expected, and as a result the expected economic impact may be higher too. In short, Powell said they expected higher inflation and slower growth ahead. The only good news there is that long-term inflation expectations, including within markets, appeared to be well anchored around their 2% target. This is another way of saying investors believe the Fed will do what it takes to tame inflation. More than anything else, central bankers worry about losing credibility as inflation expectations surge, which is what happened in the 1970s. That loss of credibility itself could push inflation higher.

Currently, inflation expectations, as measured by breakeven inflation (the difference between nominal yields and real yields taken from TIPS securities), are consistent with the Fed’s 2% target. 5-year breakeven is at 2.3% and 10-year breakeven is below 2.2%. Note that these track CPI, which tends to run 0.3 – 0.4%-points below the Fed’s preferred PCE metric. These metrics suggest markets believe the Fed can and will bring inflation down to their target. (This could also mean higher rates in the future.)

Powell believes tariffs are highly likely to generate a temporary rise in inflation through a one-time upward shift in the price level, but he also thinks inflationary effects could be persistent, and that is going to depend on:

• How large the tariffs are.
• How long the tariffs take to pass through to consumer prices.
• How long the Fed keeps long-term inflation expectations well anchored.

Powell said their main obligation is to keep inflation expectations well anchored, and to make sure a one-time increase in the price level does not become an ongoing inflation problem. They are going to balance their two mandates of maximum employment and price stability. He then added:

“Keeping in mind, without price stability we cannot achieve long periods of strong labor market conditions.”

Translation: They would like to achieve both sides of their mandate, but if forced to choose between taming inflation and avoiding higher unemployment, they are going to do what it takes to tame inflation first.

The language is very similar to what Powell used to say back in 2022 and 2023, when they were raising rates. At the time, they even said that a recession may not be avoidable, as they expected the unemployment rate to rise from 3.5% to above 4.6% (it did not go higher than 4.2%). Powell and the Fed were willing to do what it takes in 2022 – 2023 to tame inflation, even at the expense of the labor market, and Powell just sent a loud and clear message that they are willing to do so again.

This is incredibly hawkish. The only way to be more hawkish is to explicitly say they will consider rate hikes once again.

Powell is also worried that extremely high tariffs, such as those proposed, could result in a supply shock that further lifts inflation, like what happened in 2022, when supply chains got clogged, leading to more persistent inflation. Powell pointed out that CEOs he is spoken with have said that high tariffs on imported goods that are used as inputs into their processes are a big issue. Supply disruption can take years to solve and result in higher inflation for longer. An example: car supply chains may be disrupted and could take a few years to get fully resolved. That assumes we have certainty about the level of tariffs, whether over the next year or even after the current administration.

This is where it would be beneficial for Congress to mandate the tariffs into law, as it would give a bit more certainty. The problem is Congress is not even close to being involved at this point.

Markets Expect Cuts That May Not Be Forthcoming

For the time being the Fed is going to wait for more clarity from the data. Keep in mind that the status quo is not a good place. Powell has repeatedly said that rates are meaningfully restrictive right now, and if income growth continues to ease, that means policy is getting tighter if they do not do anything. That is not good for cyclical areas of the economy, including housing and manufacturing, which are also going to be hit by the weight of tariffs.

What we are seeing now are in fact fundamental changes to long-held US policy. There is no modern experience with this. Even the Smoot-Hawley tariffs were 100 years ago, and these are larger. That means there’s structural uncertainty as well, beyond immediate uncertainty related to tariffs (how much, on whom, for how long, etc.). What is going to happen is that businesses and households will step back from making decisions. Powell hopes things will become more certain, but that will depend on their understanding of what is normal, or rather, the new normal.

Ultimately, if uncertainty remains higher, it will weigh on investment and expected rates of return will have to be higher (to compensate for higher risk). If US risks are structurally higher, it will make investing in the US less attractive. Powell noted that we do not know that this will happen, but that will be the effect. It is incredible that the country’s chief central banker is saying this.

The U.S. Dollar

It is easy to overlook the importance of the U.S. dollar. Much of the currency issued by the United States is not held by U.S. citizens and U.S. companies. It is tucked away in central banks around the world. For decades, the U.S. dollar has been the world’s primary reserve currency.

“For decades investors have counted on the stability of American assets, making them the keystones of global finance. The depth of a $27trn market helps make Treasuries a haven; the dollar dominates trade in everything from goods and commodities to derivatives. The system is buttressed by the Federal Reserve, which promises low inflation, and by America’s sturdy governance, under which foreigners and their money have been welcome and secure.”

The Economist

The U.S. dollar is not as dominant as it once was. In the early 2000s, many central banks began to diversify their holdings into Australian and Canadian dollars, Swedish krona, and Swiss francs, reported The Economist.

Regardless, the reason other countries keep their reserves in U.S. dollars is because the U.S. has large and open financial markets and other countries can access their reserves when needed, reported Anshu Siripurapu and Noah Berman of CFR.

Is the U.S. dollar a safe haven?

Normally, when markets become volatile and investors flee to perceived “safe havens,” the U.S. dollar strengthens. But that is not what happened recently. Since the start of the year, the United States dollar has weakened despite market volatility, reported Randall Forsyth of Barron’s.

“The chaotic rollout of tariff policy has resulted in declines in the dollar and prices of longer-term U.S. government securities in tandem with declines in risky assets such as stocks—a reaction contrary to the currencies and Treasuries’ usual performance as havens during episodes of market volatility. Markets stabilized in the latest week but remain on edge.”

Randall Forsyth, Barron’s

One market concern is that falling demand for the U.S. dollar and rising U.S. Treasury yields could spell trouble for the United States. High demand makes it possible for the U.S. to borrow money at a low cost, reported CFR. If demand falls, that could change.

“Rising Treasury yields also cloud the outlook for U.S. government spending, and by extension economic growth. Higher yields mean the U.S. government will owe more interest on any debt it rolls over or issues for new spending, exacerbating worries about the federal deficit.”

Jesse Pound, CNBC

The federal deficit is the difference between what the government receives and what it pays out. Each annual deficit is added to the national debt.

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

Maryland Addresses Budget Deficit

Maryland has recently enacted several tax, and fee increases to address a $3.3 billion budget deficit. Key changes include:

Income Tax Adjustments:

• High-Income Earners: New tax brackets have been introduced:

  • 6.25% for individuals earning over $500,000 annually.
  • 6.5% for those earning over $1 million annually.

Vehicle-Related Fees:

• Registration Fees: For a typical passenger car, the annual registration fee is approximately $110.50, and the biennial fee is around $221, marking an increase of over 60% from previous fees.
• Electric and Hybrid Vehicles: Electric vehicle owners are subject to an additional $125 surcharge every two years during registration, while plug-in hybrid owners face a $100 surcharge biennially.

Tobacco and E-Cigarette Taxes:

• Cigarettes: The excise tax has increased from $3.75 to $5.00 per pack of 20 cigarettes.
• Other Tobacco Products: The tax rate has risen from 53% to 60% of the wholesale price.
• Electronic Smoking Devices: The sales tax rate has increased from 12% to 20% for devices, including vaping liquids sold in containers exceeding 5 milliliters.

Gambling and Cannabis Taxes:

• Casino Table Games: The tax rate has increased from 20% to 25%.
• Sports Betting: The tax rate has doubled from 15% to 30%.
• Recreational Cannabis: The tax rate has risen from 9% to 15%.

Information Technology Services Tax:

• A new 3% tax has been imposed on information technology services, with an exemption for quantum computing services in College Park.

These measures are part of a broader strategy to generate approximately $1.6 billion in revenue and implement $2 billion in spending cuts, aiming to balance the state's budget while maintaining a $2.1 billion reserve fund.

Did you Know? This Week in History

April 24, 1800: Library of Congress Established

On April 24, 1800, President John Adams approved legislation to appropriate $5,000 to purchase “such books as may be necessary for the use of Congress,” thus establishing the Library of Congress. The first books, ordered from London, arrived in 1801, and were stored in the U.S. Capitol, the library’s first home. The first library catalog, dated April 1802, listed 964 volumes and nine maps. Twelve years later, the British army invaded the city of Washington and burned the Capitol, including the then 3,000-volume Library of Congress.

Former president Thomas Jefferson, who advocated the expansion of the library during his two terms in office, responded to the loss by selling his personal library, the largest and finest in the country, to Congress to “recommence” the library. The purchase of Jefferson’s 6,487 volumes was approved in the next year, and a professional librarian, George Watterston, was hired to replace the House clerks in the administration of the library. In 1851, a second major fire at the library destroyed about two-thirds of its 55,000 volumes, including two-thirds of the Thomas Jefferson library. Congress responded quickly and generously to the disaster, and within a few years most of the lost books were replaced.

After the Civil War, the collection was greatly expanded, and by the 20th century the Library of Congress had become the de facto national library of the United States and one of the largest in the world. Today, the collection, housed in three enormous buildings in Washington, contains more than 17 million books, as well as millions of maps, manuscripts, photographs, films, audio and video recordings, prints, drawings, and digital materials.

Weekly Focus

“Patriotism is supporting your country all of the time and your government when it deserves it.”

Mark Twain, American Writer and Humorist

”Our heads are round so our thoughts can change direction.”

Francis Picabia, French Painter and Writer

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Sources:

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