Markets and Economy Update – Dealing with Delays

by Tim Doyle, Chief Investment Officer, CFP®, MBA

As a well-seasoned traveler, I’ve developed a rather efficient and methodical approach to navigating airports, particularly Denver International and Newark/Liberty International.  Both happen to be among the busiest and most chaotic airports in the country, so it pays to plan.  I approach each travel day with the preparation and precision of an Ocean’s 11 crew, which includes key factors like knowing the most convenient drop-off/pickup doors, the optimal TSA pre-check line, the nearest water bottle-filling stations relative to the gate, the cleanest restrooms that receive the lowest foot traffic, and more.

To be clear, this neurotic routine isn’t due to some innate anxiety around air travel, but speaks more to my fervid desire not to be inconvenienced in any possible way.   There are days when my plan goes off without a hitch and I find myself in my seat (aisle only, thank you) and get the quick dopamine rush that only comes with a job well done.  There are other days, however, when the plane is packed, the air conditioning is flowing with the force of a soft whisper, and the aircraft sits unmoving for minute after agonizing minute.  This is when doubts emerge and, inevitably, the intercom clicks-on and you hear the dreaded message, “Hi folks, this is Captain Bob speaking.  Unfortunately, it looks like we’re facing a bit of a delay.” 

Now, there are times when the captain and crew handle a delay with grace and class.  In these instances, the captain is communicative, sets expectations, reviews potential timeframes, and the crew does everything possible to keep travelers comfortable – including blasting the A/C.  There are other times, however, when communication is limited if non-existent, no timelines are discussed, temperatures rise, and passengers are left wondering if they will make their connection or if they’ll end up at their ultimate destination at all.

When it comes to investing over the past few months, I tend to feel like an airline passenger in the latter delay scenario.  In early March, the Trump administration began a series of announcements that declared steep, new tariffs on virtually all U.S. trade partners across the globe.  Since then, we’ve seen nothing but pauses, delays, and very little communication around what the ultimate destination might look like for the U.S. economy.  For businesses and investors alike, uncertainty abounds and we have no more idea of what long-term U.S. trade policy might look like than we did three months ago.  While uncertainty led to significant market volatility in April, we’ve seen markets rebound substantially in May. So, in this month’s letter, we’ll briefly review some of the key drivers of the big bounce in May while also outlining the Trump administration’s ‘One Big Beautiful Bill’ and what it might mean for investors and the U.S. economy in the years ahead.

Sell in May – No Way

When I first began in this business many years ago, I recall that in early spring of each year, more experienced colleagues would jokingly relay the old adage, “sell in May, go away.”  As a young pup in the industry, I assumed this saying was born out of the idea that investment managers would rather play golf all summer rather than peruse corporate P&L statements.  However, the saying was actually born of the faulty premise that markets tend to perform much better between November and April than they do between May and October.  While the premise might be faulty, that doesn’t stop financial news networks from writing “Sell in May” stories each year, as you can see in the recent headline snippets below.

In early April, the Trump administration sent shockwaves across the global economy by declaring drastic new tariffs on virtually all U.S. trade partners across the globe.  While the ‘liberation day’ trade policy announcement was expected, investors were left stunned by the magnitude of the new tariffs, and a steep selloff immediately ensued.  Meanwhile, and more alarmingly in my opinion, the 10-Year U.S. Treasury yield spiked nearly 50 basis points (0.50%) in a matter of days. While most of the investing public was focused on the stock market, this move in the 10-year Treasury rang alarm bells in bond markets as investors were left wondering how high the 10-year Treasury yield might climb.  The startling reaction by both stock and bond markets ultimately forced the Trump administration to announce a ‘pause’ on many of the newly announced tariffs less than two weeks after they were announced.

Once the Trump administration announced the tariff pause, markets began to ascend throughout the rest of April, and all major indexes moved even higher in May, as you can see in the chart below that details returns for the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average between April 1st and May 30th.

To me, this move is somewhat reminiscent of the sudden market swing in March of 2020 and, for the Nasdaq, represented nearly a +22% surge from April 8th through market close on May 30th.   While the market rebound is certainly a pleasant outcome, I’ve been surprised at the extent to which investors have tuned-out the uncertainty around tariffs and trade policy – at least for now.

Reasons for Optimism – Earnings & Inflation

In recent weeks, market optimism has largely been driven by a strong Q1 earnings season, as the blended earnings growth rate for the S&P 500 was a very healthy +13.3%.  This represented the second consecutive quarter of double-digit earnings growth for the S&P 500.  Digging a little deeper, investors were particularly encouraged by the earnings of the ever-important Magnificent Seven stocks – Alphabet, Apple, Amazon, Meta, Microsoft, NVIDIA, and Tesla.  Of these seven companies, six of them reported a positive earnings surprise and produced a combined earnings growth rate of +27.7% – well above analyst estimates of +16%.

Investors also got some positive news on inflation, as both core CPI and core PCE for April came in at 2.8% and 2.5%, respectively, and continue to tick closer to the Fed’s 2% target, as you can see below.

The topic of inflation brings us back to U.S. trade policy.  Yes, the Trump administration announced a pause on the ‘liberation day’ tariffs on countries like the UK, Germany, Taiwan, Thailand, Cambodia, and dozens more.  However, the U.S. still has steep tariffs in place on key trade partners like Canada, Mexico, and China.  Therefore, we would expect inflation to rise as giant importers like WalMart, Ikea, Home Depot, and many more pass the cost of tariffs on to consumers.  So, why haven’t we seen higher prices reflected in the latest CPI or PCE reports?

Well, you’ll remember from last month’s investor letter that we stressed that the first quarter of 2025 was unique from a Gross Domestic Product (GDP) standpoint.  As a reminder, the GDP calculation is: GDP = Consumption + Business Fixed Investment + Government Spending + (Exports – Imports).  A positive GDP number indicates a growing U.S. economy.  A negative GDP number indicates a shrinking economy and could signal recession fears.

In Q1 of 2025, imports vastly outpaced exports, and pulled U.S. GDP into negative territory for the first time in roughly four years.  This dynamic can be seen in the ‘Contributors to Real GDP” chart below with the drag of net exports represented by the purple bar.

Why were imports so extreme in the first three months of the year?  Well, as Inauguration Day approached, it had become clear that the Trump administration seemed set on implementing tariffs of some kind, even on key trading partners like Mexico and Canada.  Therefore, importers like WalMart, Ikea, Home Depot and many more stocked up on goods in anticipation of higher future prices due to pending tariffs.  By stockpiling imports, U.S. companies could secure lower pre-tariff prices and potentially weather the initial impact of new U.S. trade policy while allowing time for negotiation.

Therefore, for now at least, companies like WalMart can potentially dip into this excess supply rather than immediately raise prices across the board.  This, however, won’t last forever.  Without considerable policy changes around trade, there will likely be a time in the months ahead where the impact of tariffs will be felt in inflation reports and in the pockets of American consumers.  However, given the fact that we have very little idea which tariffs, in any, will remain in perpetuity, it’s impossible to anticipate how much higher prices will go and what impact it will have on the U.S. economy and financial markets. 

However, there is one area where investors have a bit more certainty, and that’s around tax policy.  In recent days, the Trump administration’s proposal on tax policy, dubbed the One Big Beautiful Bill, was announced, so we’ll provide an outline of what that might mean for investors next.

The One Big Beautiful Bill (OBBB)

As the old saying goes, beauty is in the eye of the beholder.  Before we delve too deeply into the reaction and potential effects of the Trump administration’s tax proposal, we’ll bullet-point some of the key features of the 1,100 page bill that recently passed the House vote by a one vote margin – 215 to 214.

Key Features of the Trump Tax Proposal:

• Extends the 2017 tax cuts for tax filers of all income levels.
• The corporate tax rate is cut from 21% to 15% for domestic production income.
• Increases the standard deduction by $1,000 for individuals and $2,000 for those married filing jointly.
• Adds a $4k bonus to the standard deduction for taxpayers 65 and up.
• Increased State and Local Tax (SALT) deduction cap up to $40,000 instead of $10,000 (current).
• No taxes on tips up to $25,000 or on overtime pay up to 20% of regular wages.
• A $10,000 interest deduction for car loans with final assembly in the United States.

Historically, tax cuts have been considered stimulative to the U.S. economy because it puts more dollars in the pockets of citizens that they can subsequently spend on goods and services.  Higher consumption should lead to a surge in economic growth as we detailed in the GDP calculation earlier.  Furthermore, corporate tax cuts are good for net profits which, in turn, can be a good thing for investors.  So, why has the Trump tax proposal been met with such a tepid response by investors and economists?

I won’t delve into fairness or wealthy vs. working class and who this bill might benefit most.  I think many of us can make our own determinations about that.  I do think this bill will add tremendous complexity, particularly around the ‘no taxes on tips and overtime’ portions of the bill.  However, the biggest reason this bill is being met with such skepticism and even criticism is the effect these tax cuts are expected to have on the federal spending deficit.

By now, many of us are aware of the fact that the U.S. government has a spending problem.  Each year, the federal government spends trillions of dollars on budget items like Defense, Medicare, Medicaid, Social Security, and more.  The problem is that the sources of government revenue like income taxes, payroll taxes, corporate taxes, tariffs and more are far below expenditures.  This leaves a federal spending deficit that is expected to be $1.865 trillion in fiscal year 2025, as you can see below.

When President Trump took office, he loudly proclaimed his goal of cutting government waste, spending and reducing (or eliminating) the federal deficit.  Initiatives like the Department of Government Efficiency (DOGE) had many economists wondering if this administration might really be attempting to address the deficit and ballooning national debt.

However, by cutting both individual and corporate taxes, the Trump administration is reducing two primary sources of government revenue.  Yes, there are proposed spending cuts, namely to Medicaid programs but, based on reports by the Congressional Budget Office and other independent researchers, the Trump administration’s tax proposal is expected to significantly add to the deficit over the next 10 years.  Below is a summary of deficit impact forecasts from a variety of sources:

Congressional Budget Office:  expected to add $2.4 trillion to the federal deficit over the next 10-years.
Yale Budget Lab:  expected to add $2.4 trillion to the federal deficit over the next 10-years.
Penn Wharton Budget Model:  expected to add $2.8 trillion to the federal deficit over the next 10-years.

While there may be some disagreements between the Trump administration’s projections and those outlined above, one thing is undeniable – Congress is increasing the debt ceiling by $4 trillion as a part of this tax cut initiative.  That would likely indicate that we should expect to see continued deficit spending in the months and years ahead.

What Does the OBBB Mean for Investors?

The problem with running a consistent federal deficit is the fact that, to fill that revenue void, the U.S. must borrow in order to cover its expenses.  The U.S. borrows by issuing Treasury bills, notes, bonds and TIPS that are purchased by investors like banks, pension funds, mutual funds/ETFs, foreign governments, and more.  This debt accumulates over time, and the U.S. now has over $36 trillion in debt outstanding, as you can see in the sobering chart below.

With the U.S. on pace to issue roughly $2 trillion in debt each year to cover the annual deficit, that is a lot of debt for bond markets to absorb year-over-year.  Furthermore, if the U.S. government shows no real initiative in addressing the deficit and the status quo remains, there may come a time when investors question the United State’s ability to service this debt in the future.  If this happens, we could see investors demand greater compensation in the form of higher yields.  If/when this happens, we could see the 10 and 30 year Treasury rates surge higher, which will push the net interest expense even higher as a result.

The problem is that rates are already high relative to what we saw in pre-pandemic times.  This means that it is increasingly expensive to service this debt each year.  As you can see in the snippet below, the net interest expense is budgeted to be $952 billion in fiscal year 2025 – or 14% of the total federal budget.

To state the obvious, that’s a lot of money.  Keep in mind, Medicare expenditures are estimated to be 16% of the federal budget in 2025.  Do we want billions (or trillions) of taxpayer dollars going to debt payments alone each year?  Furthermore, as I alluded to previously, if bond investors demand greater compensation (higher interest rates) for purchasing U.S. debt in the years ahead, that interest expense line-item will surge even higher and will consume more and more of the total federal budget.  The current path is, in a word, unsustainable. 

While that is certainly a sobering overview of what typically might be viewed as a positive (tax cuts), it’s our job to educate investors on the benefits and potential drawbacks of policy initiatives like this.  We do not see a U.S. Treasury revolt as immediate or inevitable.  In fact, the Trump tax proposal has yet to make its way through the Senate, so we’d expect a final bill to look quite a bit different than what was outlined above.  One thing is clear, there is more and more attention being drawn to the federal deficit and the national debt, and that is a good thing.  It will take political will to address this issue, and the political will is only going to materialize when there is public (voter) demand for change.  As Destiny Capital CEO, Jarrod Musick, always reminds me, “this is a simple math problem, and it’s solvable.”

In the weeks ahead, we’ll be watching very closely to see what changes the Senate suggests for the Trump tax bill.  There is also a Federal Open Market Committee (Fed) meeting that concludes on June 18th, and we’ll be closely monitoring the Fed’s stance on interest rates and more as the impact of tariffs permeates the global economy.  In the meantime, I hope many of you are in the midst of planning some fun summer adventures with family and friends.  Our team is here if and when you need us, so please don’t hesitate to reach out with anything you need.

Important note and disclosure: This article is intended to be informational in nature; it should not be used as the basis for investment decisions. You should seek the advice of an investment professional who understands your particular situation before making any decisions. Investments are subject to risks, including loss of principal. Past returns are not indicative of future results.  Advisory services offered through Destiny Capital Corporation, an Investment Adviser registered with the U.S. Securities & Exchange Commission.

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