June 2025 Market Update

The year is halfway through, government spending has accelerated, the deficit is growing, purchasing power is declining, stocks are up, and the One Big Beautiful Bill is expected to be signed into law by President Trump on the 4th of July.

The previous market update covered how after a twenty percent decline in the stock market, President Trump quickly transitioned his plans away from bringing down the deficit and toward running the economy hot, (growing the economy faster than the debt).

Treasury Secretary, Scott Bessent and President Trump both aim to weaken the dollar in hopes of growing America’s exports and igniting a shift away from consumption and toward manufacturing. But a weaker dollar means less purchasing power, and as purchasing power declines global investors may be inclined to sell U.S. dollar-based assets to avoid relative currency losses and a weaker economy.

Over the past twenty years legislative policy which has focused on weakening purchasing power has failed. As shown below, a good measure of purchasing power is long dated bonds priced in gold relative to stocks priced in gold (blue line). The chart also demonstrates the relationship between purchasing power (blue line) and home sales (orange line). If The Trump administration wants to re-create the 90's, it needs to focus on deficit reduction so the free market brings interest rates down naturally and the economy grows without the need for big government spending. Throughout the 90's purchasing power and home sales were consistently rising while deficit reduction occurred in the background.

Recently, President Trump has publicly suggested the Fed should cut interest rates substantially, and he has even gone so far as to have written the Fed Chairmen, Jerome Powell, a personal note suggesting interest rates be cut from 4.50% percent down to 1.75% percent. This would be a huge interest rate cut, and suggests President Trump knows something about the economy he hopes the Fed gets in front of instead of falls behind.

On July 9th, the tariff pause ends and the tariffs will go back on. President Trump says he currently sees no reason why the pause should be delayed. This could once again bring volatility back to financial markets.

The S&P 500 is currently very expensive and extremely narrow in breadth.

Our recommendation is to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, short to mid-term 1-10 year U.S. treasury bonds and 10-30 year U.S. treasury bonds at positive carry, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening, Short USDJPY from 153, and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2025.

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