NWP Monthly Digest | May 2025
Washington’s Own Goal
“I consider the tariff developments thus far to be what soccer fans call an own goal.” – Howard Marks
It’s been 29 days since Liberation Day, and now that markets have stabilized somewhat, I want to take a moment to say how proud I am of all our clients. Though some were nervous at times, not one pulled their money out of the market or sold stocks—and that’s actually saying a lot when considering that, at one point, the U.S. stock market was down about 20% from the record prices in the stock market in mid-February. The speed at which the market fell was noteworthy, as the decline was not due to a pandemic, global recession, or debt crisis, but instead emanated from tariffs and uncertainty out of Washington. You all deserve a pat on the back for staying focused on your long-term goals, and we’re happy to be a part of your team.
Note: Any information listed below is intended to be non-partisan and is not about political ideology. It's about recognizing how policy actions can influence market dynamics, investor sentiment, and portfolio strategy.
100 Days
Even with the recent bounce, the S&P 500 is still down more than 8% since President Trump began his second term. Tuesday marked the 100-day milestone—which is often used to evaluate presidential effectiveness, as it typically represents a new administration’s peak influence. Trump’s second term, however, resulted in the weakest market performance for a sitting president’s first 100 days since Gerald Ford took office in 1974 after Nixon’s resignation.
We often hear that “buying the dip” can be a winning strategy, and there’s truth to that. However, history shows that poor market performance in a president’s first 100 days doesn’t bode well for the rest of the term. Since 1897, there have been 12 instances when the market was down during a president’s first 100 days. In those cases, the average total return over the full term was just 12%. In contrast, when the market was up in the first 100 days—20 times in total—the average return over the four years was 44%.
Economic Boom?
Leading up to the inauguration, investor sentiment was largely positive. Messaging from the White House emphasized deregulation and a more business-friendly environment, which markets embraced. The promise of tax cuts added to the short-term optimism. Although concerns about tariffs and geopolitical friction lingered, most economists assumed the rhetoric would outpace the action—especially given Trump’s tendency to equate stock market performance with presidential success. Expectations were for cautious implementation, laying the groundwork for a continued era of U.S. exceptionalism and robust returns.
Who's ready for the boom—the “big, beautiful boom”—quite possibly the biggest boom ever, if not the biggest boom in the history of the world?
Well, that boom has yet to materialize. Instead, the landscape has been defined by uncertainty, weighing on business confidence, economic growth, capital allocation, corporate earnings expectations, interest rates, inflation sentiment, and the dollar’s strength. While many campaign trail promises had merit and were seen as manageable risks by the market, the actual policy execution has been calamitous, characterized by confusion and inconsistency.
Confusion and Lack of Consistency
A well-planned tariff rollout would still have economic repercussions, but the market could prepare and adjust. That’s not what happened. Instead, a seemingly impulsive obscure rollout of global tariffs caught Wall Street off guard.
Of particular concern was the methodology to determine the reciprocal tariff rates. Michael Cembalest of J.P. Morgan writes:
In what economists around the world are describing as “insane”, “crazy” and “embarrassing”, instead of basing reciprocal tariff rates on some combination of bilateral tariff differentials, VAT taxes and non-tariff barriers, reciprocal tariff rates have apparently been set by using the formula MAX(10%, (imports - exports) / (imports * k)), where k = 1, assuming an import price elasticity of 0.25 and an import demand elasticity of 4, then inexplicably divided by 2 “just because.”
Investors remain deeply concerned about the lack of clear intent behind these tariffs. While several narratives were presented during the campaign outlining what the administration hoped to achieve, those goals have become nearly impossible to identify in the actual implementation seen on Liberation Day. Take Madagascar, for example—can anyone reasonably explain why it made the tariff list? What’s the strategic rationale behind imposing a 47% tariff on its exports, primarily vanilla, a commodity for which there’s no true substitute in either quality or origin? In a country where the average income is just $400 per year, meaningful reciprocal trade seems implausible. As a result, the tariff acts as a direct tax on U.S. consumers, with no discernible benefit to American workers or industry.
Even more baffling, the Heard and McDonald Islands—an uninhabited external territory of Australia—somehow also appeared on the list.
These examples make it difficult to defend the tariffs as thoughtful or strategic. Either they were implemented without due diligence, or they directly undermined the stated objectives of reducing the deficit, protecting domestic jobs, countering unfair trade practices, and enhancing national security.
Clear, consistent communication could have helped. Instead, the administration undercut itself with conflicting messages. On April 6th, two top trade officials publicly contradicted each other: Howard Lutnick framed the policies as painful but permanent, while Scott Bessent positioned them as mere negotiation tools. A day earlier, Trump warned that “this won’t be easy,” only to reverse course and withdraw the tariffs four days later. It is still unclear whether this is a genuine strategy or a miscalculation. The current approach's effectiveness remains to be seen, but market skepticism suggests that investors remain cautious.
Policy Backlash
This is not what voters bet on in November, and all recent polls and surveys reflect it. Consumer expectations have dropped to their lowest point since October 2011, a time when the country was still grappling with the fallout from the financial crisis. The share of consumers who believe there will be fewer jobs six months from now has climbed to the highest level since April 2009, near the crisis peak. For context, unemployment stood at 9% in 2011. Sentiment around the stock market is just as bleak, with 48.5% of survey respondents anticipating lower stock prices in the next six months—also the worst reading since October 2011. Meanwhile, 12-month inflation expectations have climbed to 7%, according to The Conference Board.
Jim Grant, founder of Grant’s Interest Rate Observer, wrote that Treasuries and the dollar get their strength from “the world’s perception of the competence of American fiscal and monetary management and the solidity of American political and financial institutions… Possibly, the world is reconsidering.” The erosion of confidence in America has the potential to upend U.S. exceptionalism and derail what may have been the strongest economic period in history going back to the end of World War II, a period likely made possible by open borders and global trade.
The roots of this era can be traced back to the aftermath of the Great Depression, which prompted many nations, including the U.S., to erect tariffs and other protectionist policies. The Smoot-Hawley Act of 1930 raised U.S. tariffs to their highest levels since 1909—until now. A 1932 analysis in Barron’s concluded the Act had “led to very serious consequences.” A cascade of retaliatory tariffs followed, and between 1929 and 1934, U.S. trade plummeted, global commerce shrank by two-thirds, and the Depression worsened.
Now, the fallout from what’s being called “Liberation Day” threatens to reverse decades of gains in supply chain efficiency, trade alliances, strategic coalitions like NATO, and the perceived reliability of U.S. monetary policy—all once underpinned by legal clarity and institutional trust.
All of this damage was self-inflicted—highly analogous to Brexit, and we know how that turned out. Brexit cost the British mightily in terms of GDP, morale, and alliances, and it harmed their reputation for governance and stability. The proof is in the reaction from the financial markets: they see the chaos and do not like it. Gold, the dollar, bond yields, etc. Unlike in a typical market sell-off, the Trump crash has included U.S. equities, government bonds (known as Treasuries), and the dollar losing value in sync. That is unusual because investors normally plow into dollars and Treasury bonds in periods of uncertainty and financial distress.
Reprieve
Pausing the tariffs was a good first step, but stepping back, the broader developments remain bearish for markets, as most countries are still enforcing a 10% tariff. Research from J.P. Morgan concludes tariffs will still be higher than the likes we’ve seen over the past 100 years. Regardless of what level of tariff reduction we see, the baseline level of tariffs will be much higher than it was in January, and that will be a headwind on growth and a tailwind on inflation.
Now, I’m not in the camp that thinks these tariffs automatically mean the return of stagflation. Yes, it’s a risk, but the economy deserves the benefit of the doubt. At the same time, I’m not dismissive of the risks to growth and inflation that higher tariffs pose. Regardless of whether tariffs cause a recession, they are negative for growth—the only question is by how much.
Diversification
The recent policy decisions by this administration suggest that several of the longstanding advantages that justified U.S. markets trading at a premium over emerging and even developed markets have been weakened. Investors often assess the stock market using the price-to-earnings (P/E) ratio, reflecting how much they’re willing to pay for each dollar of earnings. For instance, with the S&P 500 currently trading around 5,560 and consensus earnings estimates near $270 per share, buyers are effectively paying about 20.59 times earnings to own U.S. equities. That’s a rich valuation, especially in light of today’s economic and geopolitical environment. With Europe and China trading closer to 14 and 11 times forward earnings, a 20x multiple on U.S. equities now seems unrealistic. A more grounded expectation for the P/E ratio of the U.S. stock market is in the 18–19x range, which implies continued pressure on prices.
Capital flows underscore this trend. A notable shift is underway, with investment moving away from U.S.-centric portfolios toward international markets. Goldman Sachs strategists estimate that since early March, foreign investors—led by those in Europe—have sold around $60 billion in U.S. equities, signaling growing concern over the dollar and U.S. market trajectory.
While diversification means you may hold fewer of the top-performing assets, it also limits exposure to the worst performers. For most financial plans, reducing downside risk is even more critical than maximizing upside. Although the U.S. market has delivered exceptional returns since the financial crisis, such prolonged outperformance is rare. Recent volatility has highlighted weaknesses in portfolios overly reliant on U.S. equities. A diversified strategy remains prudent, providing a buffer in case the U.S. enters a period of relative underperformance—even as we hope to maintain key strengths like corporate profitability, long-term growth, and market liquidity.
Fun Facts of the Month
Everything Up: On Tuesday, 4/22, every stock in the tech-heavy Nasdaq 100 rose on the day for just the eighth time since 2001. Following prior instances of 100% positive breadth days, the index was up at least 10% six months later and at least 20% a year later all seven times (Bloomberg).
Record Uncertainty: In the 4/23 release of the U.S. Federal Reserve’s Beige Book, which gathers anecdotal information on economic conditions, the term “uncertainty” was mentioned a record 80 times. In the 470 Beige Book releases from 1970 up until President Trump’s inauguration, the term uncertainty was never mentioned more than 32 times in a single Beige Book release (Bespoke).
Prices Coming Down: After jumping 40% from the end of 2019 before COVID to the high point of $456,000 in October 2022, the seasonally adjusted median sale price of a newly constructed single-family home has fallen 12.3% and now sits right at $400K (Census Bureau, Bespoke).
Small Get Smaller: Large-cap value stocks have outperformed the S&P 500 this year, but small-cap value has been pummeled. The large-cap S&P 500 Value ETF (IVE) was down 5.6% YTD through 4/23 versus a drop of 8.4% for the S&P 500 ETF (SPY), but the small-cap value ETF (IJS) was down more than twice that at -17.2% (Bespoke).
Slower With Age: Financial literacy scores of older adults living in retirement communities without dementia declined by an average of one percentage point each year, and only 13% of participants showed no decline or an improvement in their literacy score over time (The Journal of the Economics of Aging).
It’s Pay Up Time: On 4/21, the Department of Education announced that on 5/4 it will resume “involuntary collections” for student loans that were in default. Of the 42.7 million Americans with total student loans outstanding of $1.6T, only 38% are in repayment and current on their loans (Department of Education).
Ratings Gold: Last year’s first round of the NFL Draft drew an average audience of 12.1M viewers across ABC, ESPN, and the NFL’s linear and digital platforms. That was higher than the average viewership for the 2023 NBA Finals, World Series, and Stanley Cup Finals (Front Office Sports).
CEO Sentiment Plunges: Sixty-two percent of U.S. CEOs forecast a slowdown or recession in the next six months versus 48% in March. Fourteen percent anticipate a severe recession for the U.S. economy compared with 3% in March. Thirty-seven percent of CEOs surveyed expect profitability to increase over the next year, which is less than half of the 76% that expected profit growth in January (Chief Executive).
College on Sale: College tuition has increased 899% since 1983. The overall inflation rate during this period was 225%, but annual tuition and fees to attend a four-year private school, since peaking at $44,120 in 2020, have fallen 5.8% to $41,540 in 2024. College costs are down even more at four-year public schools: from $12,490 in 2020 to $11,260 in 2024 (-9.8%) (Bespoke).
Double-Digit Declines: The first quarter of 2025 was just the seventh time in the Nasdaq’s history that it finished the quarter down by over 10% after being up at least 3%. After the six prior occurrences, the Nasdaq was higher in the next quarter and next year each time, with average gains of 19.7% and 42.6%, respectively (Bespoke).
Small-Cap Bear Market: On the morning of April 3, the Russell 2000® index of small-cap stocks entered bear market territory (20%-plus decline from a closing high without a 20%-plus rally in between). In the 16 prior bear markets since the index’s launch in 1984, the median decline was 31% over 140 calendar days (Bespoke).
100-Plus Year High: Tariffs announced on April 2 by President Donald Trump are estimated to increase the effective U.S. tariff rate by 11.5 percentage points. That increase would put the overall effective tariff rate on U.S. imports at 22.5%, the highest level since 1909 (The Budget Lab).
Gold Crushes Stocks: With a gain of 18.5% during Q1, gold outperformed the S&P 500 (-4.6%) by more than 20 percentage points in a quarter for the 13th time since 1975. After the twelve prior quarters, the S&P 500’s average gain in the next quarter was 6%, with positive returns 75% of the time (Bespoke).
Turbulence: Less than six months after a record 51.8% rally in a 50-trading-day span, the S&P 1500 Airlines Index fell 31.2% in the 50 trading days ended April 1. Since 1995, there have been nine other periods during which the index declined 30% or more in a 50-trading-day period, with the most recent being in March 2020 (Bespoke).
Getting Active: Assets in actively managed ETFs reached a record $1.26T in February and now account for 8.3% of all global ETF assets, versus less than 4% five years ago. Of the 3,366 actively managed ETFs, average assets under management are $375M versus an average AUM of $1.26B across all ETFs (ETFGI).
Ballooning Debt: Right before COVID in 2019, federal debt held by the public was at 78.9% of GDP, but that figure is forecast to surpass 100% in 2026 (versus 97.8% in 2024) and reach a record 107.2% in 2029. The current record of 106.2% was reached in 1946, coming out of WWII (Congressional Budget Office).
Top-Heavy Population: 2025 is expected to be the first year in U.S. history during which the percentage of the U.S. population over the age of 54 (30.4%) will exceed the percentage under the age of 25. By 2033, annual deaths in the United States are forecast to exceed births, meaning that without immigration, the U.S. population would start to shrink (Congressional Budget Office).
Financial Literacy Month: April is Financial Literacy Month, but a recent poll from Pew Research found that while 67% of adults 65 and older know a fair amount about personal finances, the percentage is just 41% for adults between the ages of 18 and 29 (Pew Research).
Tough Finances: 41.8% of all U.S. consumers who applied to refinance their mortgage in the last year had their applications rejected, the highest rejection rate in at least ten years (New York Federal Reserve).
Cramped Quarters: The average Major League Baseball stadium has a capacity of over 40,000, but this year, two teams will play all their home games in stadiums with capacities of under 15,000. Sutter Health Park in Sacramento (home to the A’s) seats only 14,000, while George Steinbrenner Field in Tampa (home to the Rays) seats just over 11,000 (Bet MGM).
