Week of May 19, 2025

Key Points for the Week

• Stocks had one of their best weeks of this year, closing higher every day of the week.
• Incredibly, the S&P 500 is now positive on the year, the first year since 1982 to be down 15% then reverse and become positive within six weeks.
• Uncertainty around tariffs has not disappeared but it has declined, while a likely market-friendly tax bill is making its way slowly through Congress.
• Tariffs and the tax bill may also contribute to inflation uncertainty.

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

Major U.S. stock indices notched sizeable gains as investors celebrated a temporary trade truce with China and better-than-expected inflation numbers, while brushing off a tepid consumer sentiment reading. Here is what happened:

• The administration negotiated a trade truce with China. The United States and China agreed to reduce tariffs for 90 days. U.S. tariffs on Chinese imports will fall to 30 percent, while China’s tariffs on U.S. imports will drop to 10 percent.

“The agreement lowered tariff levels far more than Wall Street had expected, with one analyst…calling the deal a ‘best-case scenario’ for investors. Goldman Sachs cut its U.S. recession odds to 35% from 45% and boosted its growth forecast.”

The Wall Street Journal

• Inflation is closing in on the Federal Reserve’s target. Prices increased by 2.3 percent year over year in April. That put headline inflation just a smidge above the Fed’s two percent target. When the volatile categories of food and energy were excluded, prices were up 2.8 percent year over year. The price of eggs fell by 13 percent month to month leading a decline in the cost of food. Five of six major grocery store food group indexes moved lower in April.
• Consumers were concerned about inflation. While the Consumer Price Index’s April inflation numbers were encouraging, the inflation numbers in the University of Michigan’s Consumer Sentiment Survey were less so. “Year-ahead inflation expectations surged from 6.5% last month to 7.3% this month…Long-run inflation expectations lifted from 4.4% in April to 4.6% in May.”

Joanne Hsu, Surveys of Consumers Director

The U.S. bond market was in a less cheerful mood than the U.S. stock market last week. On Friday, Moody’s lowered the rating for U.S. government bonds on concerns about the deficit (the difference between how much the government spends each year and how much it takes in through taxes) and rising interest costs.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”

Moody’s

Over the week, U.S. stock markets saw solid gains with the Standard & Poor’s 500 Index moving into positive territory for the year to date. U.S. Treasury yields ended the week near where they started.

This Week in the Markets

Incredibly, the S&P 500 is now up on the year, a long way from the down 15% year-to-date return in early April. This is the first year since 1982 that the stock market was down at least 15% for the year and then turn positive within six weeks. As abrupt as the sell-off was in March and April, the recovery has been nearly as explosive. The chart below shows that only three times in history has the S&P 500 been down 15% YTD and come back to positive by the end of the year.

We have previously noted that the year after a 20% gain, as well as early in a post-election year, the first quarter of the year in the past 20 years have all tended to be weak historically for stocks.

Two Things to Monitor

Average tariff rates, even after the China pause, are at the highest level since 1934 — rising from 2.4% at the start of the year to 17.8%. If you assume imports will fall as Americans switch to locally produced goods, the average tariff rate would be at 16.4%, the highest since 1937. The good news is that we have tariffs, and now there is less uncertainty about them. Markets can price in what we know, not what we do not know.

One big impact of the tariff uncertainty is that interest rate cuts have been taken off the table until at least September. The market-based probability of at least one rate cut by July is currently less than 40%. So, the risk of elevated rates remains in place and the status quo is not benign — policy is getting tighter since wage growth is easing.

How Big Will the Tax Bill Be?

All else being equal, deficit-financed spending will boost profits (as they did in 2016-2019, 2020-2021, and even 2023-2024). If Congress does nothing, tax rates for households will revert to pre-2017 levels. Simply put, there is no way Republicans in Congress will allow that to happen, especially going into a midterm year. Renewing all the tax cuts could cost about $4 trillion over the next decade. In other words, that is the cost of maintaining the status quo. To provide an additional boost to the economy, the bill likely must be larger, perhaps closer to $5 trillion, with most benefits front-loaded. Also, keep in mind that tariffs are effectively a tax on businesses and consumers that pulls money away from the private sector into the federal government’s coffers — so the tax bill will also have to neutralize that.

The House version of the tax bill looks like it is going in this direction. The Committee for a Responsible Federal Budget (CRFB) estimates that the deficit will surge by almost 1.8% of GDP by 2027 (about $600 billion), the first year in which the policies would be fully in effect.

The Senate may overhaul the House bill in a big way (and probably in a fashion that leads to even larger deficits). In any case, this will be a big deal and is something to monitor.

How Will the Bond Market Take Higher Deficit Spending?

Whatever challenges deficits create, they are generally good for profits, which tends to flow through to stock prices. Interest rates are a different story. Rates have been rising recently, even after a soft inflation report. The 10-year Treasury yield rose above 4.5% before pulling back to 4.45%. The 30-year Treasury yield surged to 4.97%, inching close to the peak level of 5.11% we saw back in October 2023 (which was the highest since 2007). The surge in the 30-year yield should tell you that this is not a story about higher growth expectations. Long-term growth expectations have not really changed much (likely around 2 – 2.5%), and so this surge is being driven by something else.

It is not because of higher inflation expectations. One year ahead inflation expectations, as measured by inflation swaps, are running around 3.2% — not a surprise given the expected hit from tariffs. Long-term inflation expectations, as measured by the difference between nominal and real Treasury yields, are consistent with the Fed’s target of 2% inflation.

The fact that long-term inflation expectations remain “anchored” to the Fed’s target tells you that the market still finds the Fed’s commitment to keeping inflation close to their target of 2% credible. Of course, they may need to keep rates higher to maintain that credibility. After all, to a first approximation, long-term rates are an average of expected short-term rates over the next several years. There is another factor beyond this as well, the “term premium.”

The term premium is the additional return longer-term investors demand for future uncertainty, including inflation uncertainty. If there is more inflation uncertainty, they will demand more of a “term premium” when buying a long-term bond instead of a series of short-term bonds.

One thing to keep in mind here is that the Fed’s inflation mandate is to keep inflation “low and stable.” Usually, the focus is on the first word (“low”), but “stable” is critical as well. Inflation may very well average 2% over the next decade, but it could still be very volatile. If that is what investors expect, they would likely charge a higher term premium.

The term premium is hard to calculate and must be modeled, which is what several researchers, including some at the Fed, have done. One model from the New York Fed shows that the 10-year term premium is now at 0.74%, which is the highest level in over a decade and more consistent with the typical range we saw in the mid-2000s.

When the term premium moves higher, it is often because of one or both of the two reasons below (broadly speaking):

• More inflation volatility
• Excess supply of Treasuries (beyond what demand can/wants to meet)

Arguably, we have both now. Despite the pullback in extreme tariffs, there is no guarantee that tariffs will not rise even further from here. Even if we get a trade deal (or deals), there is no certainty that President Trump will maintain that. He has already replaced several of his own trade deals from the first term, including USMCA (the NAFTA replacement) and trade agreements with Japan and South Korea. Even beyond the next three years, there is enormous uncertainty as to what future administrations will do with the tariffs, and how they will treat any existing trade deals (which may not even have been fully negotiated by then). All this is a recipe for more inflation volatility.

The other factor is the tax bill being debated in Congress right now, which could increase the deficit by $4-$5 trillion, including higher interest on the debt. That means there is going to be a much higher supply of US Treasuries coming onto the market, and so even a marginal decrease in demand for Treasuries could result in much higher “net supply,” driving term premiums (and yields) higher.

You may be thinking that it will be foreigners who will reduce their exposure to Treasuries. Perhaps, but even the US private sector may not want Treasuries to the same degree they did back in the 2010s. If inflation volatility is expected to be high, the stock-bond negative correlation would break down, and there would be less “hedging” utility for long-term Treasuries.

None of this is to say that yields will jump higher if we get a massive deficit-financed tax bill, but even if interest rates stay where they are now, that is going to take a toll on the economy, especially cyclical areas like housing.

Equity markets have been on a nice run recently, perhaps in anticipation of a new tax bill (which would boost profits). From the perspective of portfolio construction, the above two questions (and their answers) matter a lot for what can potentially provide diversification.

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.

Did you Know? This Week in History

May 21, 1901: Connecticut Enacts First Speed-Limit Law

On May 21, 1901, Connecticut became the first state to pass a law regulating motor vehicles, limiting their speed to 12 mph in cities and 15 mph on country roads.

The path to Connecticut’s 1901 speed limit legislation began when Representative Robert Woodruff submitted a bill to the State General Assembly proposing a motor-vehicles speed limit of 8 mph within city limits and 12 mph outside. The law passed in May 1901 specified higher speed limits but required drivers to slow down upon approaching or passing horse-drawn vehicles and come to a complete stop if necessary to avoid scaring the animals.

On the heels of this landmark legislation, New York City introduced the world’s first comprehensive traffic code in 1903. Adoption of speed regulations and other traffic codes was a slow and uneven process across the nation, however. As late as 1930, a dozen states had no speed limit, while 28 states did not even require a driver’s license to operate a motor vehicle. Rising fuel prices contributed to the lowering of speed limits in several states in the early 1970s, and in January 1974 President Richard Nixon signed a national speed limit of 55 mph into law. These measures led to a welcome reduction in the nation’s traffic fatality rate, which dropped from 4.28 per million miles of travel in 1972 to 3.33 in 1974 and a low of 2.73 in 1983.

Concerns about fuel availability and cost later subsided, and in 1987 Congress allowed states to increase speed limits on rural interstates to 65 mph. The National Highway System Designation Act of 1995 repealed the maximum speed limit. This returned control of setting speed limits to the states, many of which soon raised the limits to 70 mph and higher on a portion of their roads, including rural and urban interstates and limited access roads.

Weekly Focus

*“Friendship adds a brighter radiance to prosperity and lessens the burden of adversity by dividing and sharing it.” *

Cicero, Roman Statesman and Lawyer

”If we want everything to stay the same, everything needs to change.”

Giuseppe Tomasi, Sicilian Writer and Nobleman

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Sources:

https://www.barrons.com/market-data?mod=BOL_TOPNAV https://www.wsj.com/livecoverage/stock-market-today-tariffs-trade-war-05-12-2025 https://www.bls.gov/news.release/pdf/cpi.pdf https://www.carsonwealth.com/insights/blog/market-commentary-stocks-climb-on-greater-clarity-but-rate-uncertainty-remains-elevated/ https://www.cnbc.com/2025/05/14/cnbc-daily-open-tame-cpi-in-april-banishes-stagflation-threat-for-now.html https://www.sca.isr.umich.edu https://ratings.moodys.com/ratings-news/443154 https://www.carsonwealth.com/insights/blog/market-commentary-stocks-climb-on-greater-clarity-but-rate-uncertainty-remains-elevated/ https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025 https://www.memorialdayfoundation.org/education/how-to-observe-memorial-day/ https://www.rd.com/article/memorial-day-poppies/ https://www.history.com/this-day-in-history/may-21/connecticut-enacts-first-speed-limit-law https://www.cmohs.org/recipients/lists/double-recipients https://dma.mt.gov/MVAD/MVAD-Images/Coins-on-headstones-meaning.pdf