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March 17, 2025 – Friday’s rally was a relief but, unless there is significant follow through today, it should be viewed simply as a relief rally. Since the start of the 21st century there have been three shock and awe moments that have frozen consumers and businesses in place leading to economic contractions of various lengths, 9/11, the Great Recession, and Covid-19. We may be at a fourth as both consumers and businesses face so many rapid fire events that they freeze in place. For equities to move higher, confidence needs to be restored and investors need to see a pathway to a better life promised by less government, increased productivity and reduced deficits.

//  by Tower Bridge Advisors

The 21st century is almost a quarter old. Over that span there have been three distinct shock and awe moments for investors, 9/11, the collapse of Lehman Brothers, and the onset of Covid-19. The stock market reacted in a sharply negative fashion each time. Away from Wall Street, Americans seemed to freeze in place. After 9/11 we collectively mourned and froze in fear that the horrific events of that day were a start, not the end to such violence. The economy was weakening for some time leading to that fateful weekend when Lehman Brothers failed, Fannie Mae and Freddie Mac were absorbed into the Federal bureaucracy, Merrill Lynch was shoved into Bank of America and AIG almost collapsed. It was the events of that weekend that pushed the Fed to pour money into the economy and Congress to pass TARP to fund “shovel ready” projects. In early 2020, Covid-19 changed our lives almost immediately, both mentally and physically. By March, the whole nation was virtually shut down. The economy stopped.

Today, a shock and awe moment appears to be happening again. As a nation, we voted to support less government, less regulation, and the use of tariffs to both raise revenues and to facilitate the changes necessary in government. But few expected the pace of change to be so violent. No one surgically dismantled the regulatory burden or unnecessary Federal expenditures (of which there is a lot!). Instead, we got Musk with his chainsaw and a President who just tripled the price of your favorite French champagne. You see the reaction on Wall Street. What we don’t see yet is the commensurate change in reported data. But you will.

People are suddenly scared. Lower end consumers were struggling to make ends meet before Trump took office. Now higher end consumers are changing buying patterns as home sales fall and their IRAs tank. Businesses don’t know how to respond to tariffs given their on today, off tomorrow nature. Maybe that’s Trump’s style and maybe it will be a winning formula in the end. But no one can see the end today. And so, we freeze in place.

Both Trump and Musk speak in hyperbole. They exaggerate. Courts have tried to slow things down. Many laid off workers are now back at work, at least for the moment. There remains sound logic for Trump’s goals. There are too many regulations. The Federal bureaucracy is bloated. But when events move too fast, people don’t know what to do. So, they don’t do anything. They froze after 9/11, after the fall of Lehman, and while Covid-19 was placing all of us in quarantine.

So, how did we recover? 9/11 happened as the economy was decelerating anyway. The stock market was still trying to recover from the bursting of the Internet bubble. But over the ensuing months, President Bush retaliated against Afghanistan and Iraq, and America slowly regained some confidence. The Fed cut rates which stimulated a strong rebound in home demand. After the fall of Lehman, Congress passed TARP and the Fed flooded markets with money. It took some months for green shoots to emerge, but they did. Within six months the Great Recession was over. We all quarantined ourselves in the late winter of 2020 but slowly we started to come out of our cocoons in spring. The Federal government again flooded markets with money and within just a couple of months the bear market was reversed.

We are in another shock and awe moment today. It would be nice to think that Friday’s rally was the end of any correction. But in the three prior periods I just mentioned, there was a catalyst to bring the moment to an end. In 2002, the U.S. went after the bad guys obliterating al Queda in Afghanistan and taking down Hussein. The Fed cut rates to stimulate spending. In 2008, massive relief from Congress and the Federal Reserve planted the seeds for recovery. In 2020 there was a clear bottom when everyone went into lockdown. Almost by definition, that had to be the bottom. How could economic activity get worse than when we were all quarantined? Again, Congress and the Fed stepped in big time.

But today we aren’t at that moment, at least not yet. Trump isn’t wrong to attempt to reduce the size of government. Federal deficits are 7% of GDP and will keep rising if not addressed. That is a road to disaster. Raising revenues might help but the real issue is containing expenses. To bring the cost to service debt down, government spending has to be reduced by over $1 trillion. The biggest chunks are likely to come from defense and Medicaid. Defense Secretary Pete Hegseth has been instructed to cut spending from existing programs by 8% per year. It can happen. Medicaid can also be reduced by hundreds of billions of dollars by eliminating fraud, enforcing work requirements, and shifting burden back to the states. Yet we all know that stating a goal in Washington and achieving cost reduction are two very different issues. So far, the administration has talked the talk. Now it is time to walk the walk.

Cutting costs and increasing tariffs are short-term headwinds. Wall Street isn’t likely to embrace the back side of the process until the efficiencies that result from a streamlined government and a smaller debt service burden begin to become more evident. Markets don’t move in a straight line and perhaps Friday’s rally was the start of a temporary reprieve. But more likely we face a reduction in forecasted earnings and upward inflationary pressure from the tariffs before any benefits are evident. We are less than two months into the new administration and already approval ratings for Trump’s handling of the economy are at or below any level during his first term in office. Simply saying “trust me” isn’t going to provide much comfort.

It isn’t just the stock market that is moving in violent fashion. The dollar has been falling steadily since Inauguration Day. European equity markets are rising as ours fall. Governments overseas see the U.S. as a less reliable security blanket. As a result, they are taking steps to be more self-sufficient, especially for their own defenses. So far, there has been more talk than action but the belief is that the world order is changing and our allies worldwide need to adjust. The weakness in the dollar actually provides a benefit to Trump’s game plan by making U.S. exports cheaper and imports more expensive before incorporating the impact of tariffs.

All of this reconfiguration is just in its embryonic stage. There are few signs yet that the Trump administration is slowing its pace of new pronouncements. Not all have economic impact, but all are designed to shake the tree, reinforcing, at least for the moment, our collective concerns over the ultimate outcome. Overseas, adjustments are in early stages as well. The war in Ukraine drags on without solution. Ditto in the Middle East. All these concerns tie together.

Tomorrow and Wednesday, the Federal Reserve’s Open Market Committee (FOMC) meets. No one expects a change in interest rates. Inflation is still above target, the unemployment rate is barely above 4%, and data suggests the economy is still growing although the growth rate appears to be decelerating. What investors will fixate on are (1) Chairman Powell’s post-meeting comments that may suggest a change in the likelihood of future rate changes, and (2) the dot plots of forecasts of FOMC participants. Will they present a more pessimistic outlook than in December when the last set of dot plots was issued? Might there be a faster set of rate cuts should the economy weaken more than previously expected? Rate cuts are sometimes viewed as Wall Street’s crack cocaine. Lower rates are stimulative. But there is a fly in the ointment. Long-term rates reflect inflation expectations. What investor wants to accept a lower current return and get paid back with ever cheaper dollars ten years down the road? While the short-term rates the Fed sets are stimulative, parts of the economy, particularly housing, are tied to long-term rates. The Fed realizes that deficits of 7% of GDP or more are a road to ultimate disaster. Markets are starting to become concerned as well. Note the rebound in the 10-year Treasury yield the past two weeks while the stock market was tanking.

For a sustainable recovery in the stock market, investors need to see a path ahead that shows greater productivity, less government interference, inflation moving toward a sustainable 2% target, and better growth trends. The Trump administration suggests bold cuts early will set the stage for significant improvement later. One can dispute the way Washington is going about effectuating the changes without challenging the goals. Right now, however, there still lacks clarity whether the game plan is starting to work. We know consumer confidence has been shaken. We see it anecdotally in forecasts from large retailers to future airline bookings to the pace of home sales. We need to see green shoots which show that steps being taken are beginning to have positive impact. Few are apparent right now.

Fixing something broken isn’t easy. A lot of the pain happens first before the benefits of repair become apparent. Stocks have been fully valued for some time. The euphoric Trump rally after Election Day was misplaced. Investors forgot the necessary up front pain. Now we see the pain. Moods that have flipped from euphoric to despondent overexaggerate in both directions. Recession isn’t inevitable but possible. Cabinet Secretaries have their directives. They are to right size their departments, shrink government, eliminate extraneous regulations, and rebalance expenses with revenues. If that can be done effectively, we will all benefit. Add in the future productivity gains emanating from artificial intelligence and there is a very possible rosy path ahead. Getting there, however, won’t be pain-free. Looking through the lens of equity investors, it doesn’t have to be a straight path down. A lot of the readjustments have already taken place, particularly in the tech sector. As noted last week, some of the high-profile names are suddenly cheaper than Wal-Mart and Coca Cola. Market corrections and bear markets offer the best buying opportunities. Be patient. Don’t panic. There is always light at the end of the tunnel.

Today, Olympian Katie Ledecky is 28. Kurt Russell turns 74.

James M. Meyer, CFA 610-260-2220

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « March 13, 2025 – The NCAA college basketball tournament known as March Madness kicks off this coming weekend. Part of the allure for fans is the unpredictability of the NCAA tournament. Cinderella stories, surprise upsets and general chaos among millions of March Madness brackets nationwide are the norm. As in the stock market, unpredictability and uncertainty are part of the investing process, and last year’s winners may not be this year’s victors.
Next Post: March 20, 2025 – Fed Chairman Powell’s reassuring statements about “transitory” inflation and the Fed’s decision to slow balance sheet reduction triggered a significant market rally, despite downward revisions to 2025 growth and earnings forecasts. The current economic landscape is heavily influenced by political policy changes, creating heightened uncertainty and potential volatility for investors. While a lower 10-year Treasury yield is a potential silver lining, gold’s recent surge to all-time highs raises questions about its relative valuation compared to other assets and its historical correlation with U.S. debt growth. »

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  • May 30, 2025 – Amidst a volatile market, significant economic risks such as high interest rates and trade policy are creating a tense environment where stock market gains may be capped. Key sectors, like housing, are already showing signs of strain from elevated rates, while the bond market remains turbulent. Therefore, a diversified and defensive investment strategy is recommended, emphasizing fundamental analysis and valuation discipline for stocks while holding high-quality bonds to navigate the expected volatility.
  • May 27, 2025 – The House has passed Trump’s big beautiful bill and moved it on to the Senate. It’s a budget buster that offers something for all but will expand deficits meaningfully. It’s a bit of a mess that can be fixed if the Senate has the backbone to fix it. Wall Street will be watching, especially bond investors.
  • May 22, 2025 – Memorial Day Weekend is typically the unofficial start of summer for many. However, this year has been anything but typical. Corporate earnings have been holding up based on recent company reports and outlooks. Tariffs have dented a few earnings reports, but the consumer continues to spend. Credit spreads are not indicating a recession yet, although interest rates have been on the rise as Congress works on a spending resolution bill. Markets gave back some of their recent gains yesterday but are still only about 5% from their all-time highs. Not quite bear market territory. Anyone traveling this weekend to a national park should remember to bring their bear spray.
  • May 19, 2025 – Stocks have clawed back all their post-Liberation Day losses as the perceived impact of tariffs have lessened. But now comes the hard part. Whatever tariffs are imposed will have economic consequences that we are only just starting to see. The big tax bill as originally proposed is a budget buster. 10-year Treasury yields are now back above 4.5%. With hindsight equity investors overreacted after Liberation Day. The subsequent rally may have gone too far as well.
  • May 15, 2025 – Following a big rebound, the S&P 500 is flat YTD but trades at a high valuation of 23x forward earnings. Consumer spending faces headwinds from rising student loan defaults and a cooling housing market. While recession fears have eased, the economy is slowing and inflation trends remain uncertain.
  • May 12, 2025 – China and the United States have agreed to reduce tariff rates on each other by 115% leaving our tariff rate on Chinese goods at 30%. Since shortly after the shock of Liberation Day that sent equity investors into panic mode, there has been a gradual retreat from an overbearing tariff framework outlined that day. Today’s suspension of tariffs, pending further negotiations may not be a final step. But it comes right out of the Trump playbook that shoots for the moon first and then settles into a much more compromised reality later. While tariff negotiations continue not only with China but the rest of the world, investors can now focus on the next leg of the Trump agenda, tax cuts.
  • May 8, 2025 – The Federal Reserve on Wednesday held its key interest rate unchanged in a range between 4.25%-4.5% as it awaits better clarity on trade policy and the direction of the economy. While uncertainty about the economic outlook has increased further, the Fed is taking a wait and see stance toward future monetary policy. Meanwhile, the S&P 500 Index has just about fully recovered its losses following the April 2nd “Liberation Day” when major tariffs were announced on U.S. trading partners. The bounce in risk assets is welcome, but we are still looking for white smoke signals showing that progress on inflation and tariffs is being made.
  • May 5, 2025 – Investors overreacted to Trump’s early tariff overreach but may have gotten a bit too complacent that everything is now back on a growth path. While there are few signs of pending recession, the impact of tariffs already imposed are just starting to be felt. So far, no trade deals have been announced although the White House claims at least a few are imminent. The devil is always in the details. Congress will start to focus on taxes. Conservatives may balk but there is little indication to suggest they won’t acquiesce to White House pressure once again.
  • May 1, 2025 – U.S. GDP unexpectedly contracted by 0.3% in the first quarter, the first decline since 2022, largely due to a surge in imports ahead of anticipated tariffs. Despite this GDP contraction, major tech companies like Alphabet, Microsoft, and Meta reported quarterly earnings, indicating continued strength in areas like advertising and cloud computing. However, concerns remain about the broader economic outlook due to uncertainty surrounding tariffs, potentially leading to higher prices, weaker employment, and a challenging environment for the Federal Reserve regarding inflation and interest rate policy.
  • April 28, 2025 – Markets rallied as the Trump Administration suggested tariffs might be reduced against China and that ongoing negotiations with almost 100 countries are progressing, although no deals have yet to be announced. But even with tariff reductions, the headwind will still likely be the greatest in a century. So far, the impact is hard to measure as few tariffed goods have reached our shores. Early Q1 earnings reports show little impact through March, although managements have been loath to predict their ultimate impact. Stocks are likely to stay within a trading range until there is greater clarity regarding the impact of tariffs.

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