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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.

//  by Tower Bridge Advisors

Transitory—not again!
Stocks surged yesterday, with the S&P 500 experiencing its largest gain since July, while bond yields fell sharply following the Fed’s March meeting, press release, and news conference. Jerome Powell’s measured response to the potential economic impacts of Donald Trump’s trade war, specifically citing the potential for “transitory” inflation from tariffs, calmed investor fears and triggered a significant market rally. Powell emphasized that recession risk was “not high” and acknowledged the potential for tariffs to have a temporary effect on inflation, which reassured investors. Additionally, the Fed’s decision to slow the pace of balance sheet reduction, which lessens the amount of liquidity that it removes from the market, further fueled the market’s positive reaction.

Powell’s ability to “thread the needle” by balancing concerns about inflation and growth was key to the market’s response. Despite the Fed revising growth expectations for 2025 downward from 2.1% to 1.7% and increasing inflation estimates from 2.5% to 2.8%, the market focused on Powell’s dovish signals and the Fed’s planned reduction of Treasury holdings. The correction in stocks prior to the meeting had already priced in a more pessimistic economic outlook, allowing investors to capitalize on Powell’s reassuring statements. Market participants, who had significantly reduced equity holdings leading up to the meeting, began to rebuild their positions, driving the rally further.

Whether we like it or not, the reality is that the abrupt and significant change in government policies is very likely to have a short-term impact on consumer and business spending—it is logical. Investors reacted swiftly once it became clear that the tariffs and cuts to government spending weren’t just talking points. The S&P 500 is down -8% from its January high and -3.5% YTD. Chairman Powell calmed investors’ nerves yesterday, but that doesn’t mean the coast is clear for investors.

Downward earnings revisions for 2025
If we assume that the Fed’s forecasted slowdown in GDP is correct, at least directionally, it is also likely that corporate profits will experience downward pressure relative to currently forecasted growth rates. We have already heard about softness in spending from a number of CEOs in retail, travel, and other consumer discretionary businesses. We are about to end the first quarter of 2025 and will learn more in about a month when earnings season starts. In the meantime, analysts are already lowering expectations. Since the beginning of the year, corporate earnings growth for 1Q25 has declined from +12% to +7%. In other words, the profit growth rate has been lowered by 37%.

Ordinarily, changes in economic statistics are driven by changes in consumer spending, business investment, central bank actions, etc. Today, politics are the major force driving changes in the economy. This makes it difficult for the investment community to gain confidence in almost any forecast and will likely lead to more volatility than is normal, in our opinion. The nature of the uncertainty is different this time, one might say.

Looking for the silver lining
Until last evening, one noticeable surprise since the administration took office has been the absence of President Trump’s badgering of Chairman Powell to lower interest rates. Threats of firing the Federal Reserve Chairman have not been made. For a while, it seemed that someone had rightly focused the administration’s efforts on actions designed to lower the 10-year US Treasury yield rather than the Fed-controlled short-term rates. Long-term interest rates, which are set by the market, are the primary determinants for mortgage rates and companies’ cost of capital. Lower long-term rates could also enable the government to extend the US debt maturities, which would provide more flexibility in dealing with the nation’s mounting debt load.

We have highlighted this before, but it continues to warrant attention. A lower 10-year US Treasury yield is critical to the administration’s goal of improving economic growth and enabling President Trump’s ambitious tax reductions. Slower economic growth in the near term, whether it’s driven by tariffs or government spending reductions, may help achieve a lower 10-year US Treasury yield. The question is whether the economy can bend but not break. We will have to wait and see.

What about gold?
Gold has recently been hitting all-time highs. We’ve been analyzing the current investment landscape, particularly concerning the relative valuations of gold, real estate, and equities, alongside the macroeconomic backdrop. A simple comparison involves measuring all the above-ground gold—estimated at $20 trillion—with the $50 trillion value of U.S. residential homes and the $48 trillion market capitalization of the S&P 500. If we remove the gold used for industrial purposes and non-investment jewelry, we are left with about $11 trillion. Even with this adjustment, the sheer magnitude of gold’s value remains substantial and possibly excessive, especially when considered in the context of other asset classes like stocks and real estate.

Interestingly, in 2007, all the above-ground gold was estimated at $5 trillion, while U.S. housing was valued at $26.7 trillion. Coincidentally, the U.S. national debt has quadrupled from $9 trillion to $36 trillion, mirroring gold’s value increase. This correlation suggests that gold has, in essence, kept pace with the expansion of U.S. debt. Total U.S. debt is currently compounding at 6% annually. If the administration achieves its goal of reducing the annual deficit to 3%, the implications for future returns to gold investors could be disappointing if the recent historical correlation between U.S. debt growth and gold price appreciation holds. Of course, betting that Congress can maintain a sustained period of fiscal restraint is likewise hard to imagine.

Hockey great Bobby Orr turns 77 today, film director Spike Lee is 68 and actress Holly Hunter turns 67.

Christopher Gildea 610-260-2235

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 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.
Next Post: March 24, 2025 – Last week’s earnings from FedEx, Micron, Lennar and Nike, all on the same evening serve as a prelude to the pending earnings season. Stocks of all four companies declined 5-10% the next day as expectations for the coming months were lowered. Before we get to earnings season in about three weeks, we will see an onslaught of tariff news. There are no signs of recession yet, but the odds are higher than 30 days ago. It is probably prudent to maintain larger than normal cash reserves until passing the heart of earnings season about a month from now. »

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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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