- By Dorothy Jaworski
We made it through the long, cold
winter. There were days it was so cold I
did not want to leave my house. Even
President Trump’s inauguration on January 20th was moved indoors to
the Capitol Rotunda because of wintry temperatures. We suffered through the cold but had very few
snowstorms as they seemed plentiful south of Philadelphia and basically missed
us.
Undoubtedly, the Eagles 40-22 win
over the Chiefs in the Super Bowl was the highlight of the quarter. The excitement built with every playoff game
and the Eagles performed at a high level.
Acquiring Saquon Barkley changed this team. Jalen Hurts, the O-line, and receivers AJ,
Devonta, and Dallas outperformed, and we owe much respect to the defense! An estimated 1.5 million fans turned out for
the parade. As Nick Sirianni said, “You
can’t be great without the greatness of others.” Now, all eyes turn to the Phillies. A long, hot summer will determine if they can
challenge the World Series LA Dodgers for MLB’s crown this fall.
Stocks and Bonds
It feels like we’ve been on a
roller coaster when it comes to the markets this quarter. We rallied for much of January until the 27th,
when we received the DeepSeek AI announcement that a Chinese firm developed
their own AI model for $6 million. What?
Not billion? It was chaos in the tech sector. Nvidia and Broadcom, known for their AI
chips, each fell -17% for the day, with market cap losses of -$587 billion and
-$195 billion, respectively. It’s
estimated the whole AI market lost $1 trillion that day. If China could develop technology so cheaply,
why would our companies spend billions of dollars? In a wild frenzy, millions of people
downloaded DeepSeek AI. They didn’t
learn from TikTok? Well, it wasn’t long before we discovered the
truth; Microsoft reported that DeepSeek was copied from Open AI’s ChatGPT
through improper use of an Open AI distillation tool. The intellectual theft by China continues. The markets soon recovered a lot of the
losses.
Prices at the end of January
seemed to hold up pretty well, but volatility and sell-offs took over in
February and especially March. In those two
months, the DJIA fell -6.6%, the S&P 500 fell – 7.6%, and the Nasdaq fell
-11.7%. Gone are the new handles I wrote
about last quarter: DJIA 45,000, S&P 6,000, and Nasdaq 20,000. The media narrative turned to trashing
tariffs and daily claims of recession and inflation that have rocked the
markets. I will discuss tariffs shortly.
Bonds rallied overall during the
quarter with yields on the 2-year to 10-year Treasuries falling by -28 to -33
basis points. Yields spiked in January,
with the 10-year reaching 4.81%, before falling to around 4.25% now. The yield curve briefly inverted again at the
end of February (10-year minus 2-year) at – 8 bps but since has returned to
positive at +34 bps. The 10-year to
3-month spread is generally flat. By the
way, gold has rallied to new highs at $3,085 per ounce, up an astounding +42.6%
in the past year, oil prices are at $69 per barrel, down -16.5% from last year,
while AAA gas prices are at $3.16 per gallon, down -10.7% from last year. Let the energy price declines begin.
Trump and Policies
Rarely have we seen a Presidency
start off with so much action. President
Trump and his Cabinet have worked quickly to enact his policies and campaign
promises on stopping illegal immigration, securing the border, and
deportations, lowering income taxes for individuals and businesses, reducing
prices, examining and cutting government spending and staff in every agency,
with DOGE doing the analyses for the departments. (To date, DOGE has identified $130 billion of
savings and cuts, with a goal of many times this amount), Other policies include enacting tariffs- both
as a negotiating tool and to increase revenue to equalize the trading with
other countries, using our massive oil and gas reserves to increase energy
production, improving economic growth, and working to end the endless wars in
Ukraine and Gaza.
So far, he has had success on the
border and on the business side- securing almost $2.8 trillion of commitments
from large US and foreign corporations to build and manufacture products here
in the US over the next few years. Oil
and gas drilling is back and new leases are being sold once again. Trump feels that lowering energy prices can
have a cascading effect to lower prices of almost all goods. Growing the economy, increasing private
sector jobs, not government ones, and increasing real wages are top goals.
Tariffs and Taxes
The media also developed a
recession narrative during the first quarter, even though few, if any,
corporations mentioned recession during their first quarter earnings
calls. But suddenly it’s a big
narrative. The Fed played into this with
their quarterly projections in March and lowered their GDP projections to +1.7%
to +1.8% in 2025 and 2026, respectively, from above +2.0% in the prior
projections in December. Yet they are
only lowering rates twice this year- the same as their last projection? The Atlanta Fed GDP Now estimate for the
first quarter was -2.8% as of March 28th, even though they admit the
estimate is not incorporating foreign trades of gold properly. Be careful what you wish for; recessions are
often self-fulfilling prophecies. It’s
ridiculous.
The tariff situation has been
very volatile since Trump first started announcing them in February. He used some as negotiating leverage, some to
protect US industry (autos), and some to level the playing field with
reciprocal tariffs to just make trade fair.
The media narrative is that tariffs are inflationary. I disagree.
If spending occurs on products with higher tariffs with higher prices,
then less spending will occur on other goods with lower or no tariffs and those
other goods’ prices will fall. Prices
tend to adjust throughout the economy.
If high tariffs depress demand, those manufacturers likely will lower
prices. Of consumers’ purchases
currently, about 15% is on imported goods.
The Fed and NBER both studied the effect of Trump’s first term tariffs
and found no effect on inflation, which continued to run below the Fed’s target
of 2.0% then. Tariffs do not cause
inflation; as Milton Friedman taught us, “inflation is always and everywhere a
monetary phenomenon.” Even Chairman
Powell knows this and called the effects of tariffs “transitory.” (oh, no, not that word again!). Despite knowing the results of studies on
tariffs, he said he was “uncertain” of their impact. Guests on Bloomberg guests on the day of the
Powell press conference said “Why are we hanging on every word Powell says,
when he keeps saying he doesn’t know?”
Bur mark my words, once Congress
passes the large tax bill making the Trump tax cuts of 2017 permanent,
increasing the SALT deduction cap, lowering the corporate tax rate from 21% to
15%, putting in business deductions for accelerated depreciation, lowering
individuals’ tax brackets, and including no tax on social security, tips, and
overtime, the narrative about recession will quickly disappear.
What About Other Indicators?
Here are some of my favorite
indicators; watch them and you will know what’s happening:
- Leading economic indicators, or LEI, continue to
be weak. February was -.3%, January was
-.2%, and December was -.1%. Of the past
33 months, only two were positive: March, 2024 and November, 2024. The Conference Board restated the index with
benchmark revisions and it’s back above 100 (2016 levels) at 101.1 in February. No surprise here.
- Real GDP was +2.4% in 4Q24 with nominal GDP at
+4.8%. Real GDI was +4.5%; the average
of GDP and GDI was +3.5%. As mentioned
earlier, the Atlanta Fed GDP Now 1Q projection number is -2.8%. They publish it even though they state they
are not including foreign trade in gold correctly.
- M2 year-over-year growth in both February and
January was +3.9% and December was +3.8%.
Friedman taught us that growth in the money supply should approximate
nominal GDP growth, which is currently at +4.8%. They are catching up and this is probably why
they are cutting back on QT, their bond selling program. After a period of decline in y-o-y M2 from
December, 2022 to February, 2024, M2 growth has steadily ramped up.
- Inflation.
Here’s the rundown. It’s not so
terrible. PCE 4Q24 +2.4%, core PCE 4Q24
+2.6%, PCE February +2.5%. core PCE February +2.8%, CPI February +2.8%, PPI
February +3.2%. The Fed target of +2.0%
is on headline PCE; CPI is +.5% higher with +2.5% as an implied target. The 5-year Treasury Tips spread is 2.67%; the
10-year TIPS spread is 2.38%. The final
March survey of the University of Michigan showed the 5-year inflation
expectation was +5.0%, but sorry, they are wrong.
- Unemployment.
The BLS benchmark revision reduced -589,000 from reported jobs in 2024,
not the original -818,000 projected last August. The unemployment rate was 4.1% in February
compared to 4.0% in January. Unemployed
persons are 7,052,000 and the pool of available workers is 12,945,000; both
have been on the rise in recent months.
- The Fed has been boring lately. We know they are afraid to change rates, even
though Powell says they are “meaningfully restrictive.” The Fed is uncertain what tariffs will do,
uncertain what inflation will be (their projections from March are outrageous-
they do not hit the 2.0% PCE target until 2027!
What?!), uncertain what GDP will do (of course, they lowered it below +2.0%). Powell kept saying they are “uncertain.”
“it’s hard to tell,” “they just don’t know,” and “we’ll see what happens.” Wow…where does that leave the rest of us?
I feel like I’ve gone on longer
than usual this quarter, so I’ll wrap it up here. I just got back from a wonderful week with
great friends in Palm Beach County, Florida.
Sorry, we had no Trump sightings.
I’m looking forward to more traveling in the second half of this
year. Isn’t that what retirement is all
about? Stay tuned!
I appreciate your support! Thanks for reading! DLJ 03/28/25
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.
Disclaimer: This publication is provided to you solely for educational and entertainment purposes. The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed. The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice. The author cannot provide investment advice but welcomes all of your comments.
