As we gyrate through 2025, I recently found myself contemplating market dynamics while riding my mountain bike. Allow me to draw a parallel between mountain biking and stock market investing.
For many years, I have ridden with a group that pursues trails classified as “black diamond.” These trails present significant challenges that might question our sense of judgment, yet we navigate them. When descending a steep, rugged, rocky trail, it is essential to focus several feet ahead rather than directly below. Even so, the terrain can become hairy, prompting thoughts of hitting the eject button. However, experienced riders understand that bailing out often results in injury. Your probability of success increases when you persevere and continue forward, despite the rough conditions.
This does not imply recklessly charging down a trail without selecting a path or managing your speed. Similarly, investing involves turbulent periods that may tempt us to withdraw. Some investors do bail out and typically suffer losses. Conversely, those who remain invested usually reap rewards. These individuals prepared before taking the plunge; they assessed their risk tolerance and considered their future financial needs.
There are a lot of obstacles as we look down the trail. For one, the Fed independence is in question. With Trump calling for Chairman Powell firing, markets get antsy. I agree that the Fed was late increasing rates when there were clear signs of inflation. But I also believe in the Federal Reserve staying independent. The President (presently) seems to agree that Chairman Powell should stay put.
Then we have the tariffs. The retreat was inevitable as they were hastily designed (the math didn’t math), imposing a tariff on an Antarctic island inhabited by seals and penguins. However, we are still “waiting for Godot.” There doesn’t seem to be a point to the tariffs, we are now hoping this administration is playing 4D chess. We will see. In the meantime, Treasury Secretary Scott Bessent admitted that “the tariff standoff with China is unsustainable.”
While all the above has taken place, the markets tied to the United States are acting like an emerging market. Stocks are down, bonds are down (rising yields) and the dollar is down. A look Brazilians, Argentinians and Mexicans are very accustomed to. The US is the largest debtor with more than $35 trillion of debt outstanding. With about a quarter of our debt held by foreign investors, tariffs on our trade partners created a reaction to sell our debt. In fact, after “liberation day” we watched the 10-year treasury yield jump by the largest amount in about 25 years. But the fears of foreign countries weaponizing our debt are a bit overdone. For one, because they own large amounts, they would need to find a buyer – a buyer that would expect a haircut. This would cause a major loss in value, that the foreign seller would not be willing to take.
Despite these challenges, potential opportunities remain for recovery if favorable policy shifts occur, and economic resilience is demonstrated in future data reports. We have watched a few of these policy changes play out. The changing tone from Washington is giving traders relief. Trumps inner circle is clearly looking at the pain in markets and the economy – pain that has happened in very short order, I may add. While we do not wish for market declines (especially the way these have happened), it is usually good to take a breather after two strong years. Following 2023 and 2024, a booming stock market in 2025 would set the stage for major pullback in the future. Look at the chart on the Magnificent 7, they are the driving force of this current downturn. With those negative numbers for the Mag 7, most are still (very) positive for the last 2.25 years. Those stocks were also getting very expensive.
Keep your focus on the longer term. I am pretty sure you will hear more rhetoric that will make you uneasy. As the charts show, in the long run, stocks prevail. The United States still has the top companies in the world, and based on recent employment numbers, people are still working.
Keep your eyes forward and head looking down the trail. Also, with the great weather, put away that phone and get out and ride – it is a magical world out there. We look forward to speaking with you over the next couple of weeks. As always, please reach out if you have any questions or concerns.
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