March 2025 Market Update

The first quarter of 2025 is complete. The S&P 500 ended Q1 down -4.73%, the 10yr interest rate down -36 basis points, and gold prices were up +19.3%. The most notable institutional change since the turn of the year has been from the White House, with the inauguration of the Trump administration. But the most recent notable changes have come from the Fed. In only the second FOMC meeting since the inauguration of the Trump administration in January, the Fed has completely flipped their economic outlook from declining inflation and strong economic growth, to increasing inflation and declining economic growth. The outlook and messaging from the Fed could not have changed faster.

The FHA mortgage delinquency rate is on the rise at 11.4%, houses are beginning to sit on the market longer, total housing units under construction is beginning to decline, real personal income growth has been stagnant, the jobs hiring rate is at a decade low, and the 10yr interest rate continues to follow federal interest expense as a percentage of economic growth higher, denying individuals, businesses, and the government the ability to refinance debt at a lower interest rate. The economy continues to weaken slowly, but as government spending is cut and demand stumbles, any onset of cyclical employment declines could quickly drive the economy lower and prove the Feds current inflation and interest rate forecast complacent.

We hear often about the performance and new highs of the S&P 500, which is a large cap index of equities. But we do not hear the same about small and micro-cap equities, which is the small business piece of the stock market. That is because for the past few years these small and micro-cap businesses have had trouble getting new loans and capital. Even though market participants and executives have been optimistic about lower interest rates and refinancing opportunities, government spending has crowded them out. Small and micro-cap equities are where much economic growth and innovation stem from, but the small business piece of the stock market, never made new highs and has struggled since the beginning of 2022. Small business stocks reflect the real economy. It is tough out there.

Chart above of Mirco-Cap Equity ETF

The Trump administrations tariffs are set to begin on April 2nd. This should shake the world up. Tariffs should lead to a reduction in corporate profit margins, prices, and interest rates. America has a severe problem coming if the government cannot refinance its debt below the rate of economic growth. Policy makers will also meet to vote on extending the Trump tax cuts. Extending the tax cuts is critically important to keeping consumption from declining. Hopefully, the government will come together on these issues or else the market may experience more turbulence than necessary.

Federal interest expense as a percentage of total economic growth vs 10yr interest rate

If the department of government efficiency and Elon Musk are successful at reducing government spending, then it is possible the appetite for owning U.S. treasuries changes, like the change in appetite for owning Argentina bonds since President Milei’s success at cutting government spending and reducing inflation.

We feel any short-term rise in U.S. 10yr interest rates would provide an opportunity to acquire U.S. 10yr bonds before the interest rate declines into an economic downturn, which would benefit the U.S. government’s ability to refinance debt below the long-run average economic growth rate.

Chart above of 7-10 year Treasury Bond ETF IEF

The LEI (leading economic indicators) have been in decline for over 18 months, small business stocks have been stagnant since the beginning of 2022, and almost all of the earnings growth for the S&P 500 over the past few years has come from approximately 10 large cap tech stocks whom receive contracts from government spending. If the stock market were to quickly decline, absolutely nobody should say they never saw it coming. Especially the Fed.

Our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening added September 2024, 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.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice