U.S. Tariffs, Markets, and What It Means for Investors in 2025

Hello, friends of Lorry Capital!

As we move deeper into 2025, we're witnessing significant turbulence in global trade policies, financial markets, and monetary strategies. Let's unpack what's happening, why it matters, and how it might affect your investments—whether in traditional markets like the S&P 500 or in cryptocurrencies like Bitcoin.

Tariffs: A Stormy Sea

U.S. tariffs have climbed dramatically since 2018, particularly targeting Chinese imports, and now average around 30%, down from brief peaks over 100% earlier this year. Historically, tariffs have injected uncertainty into markets, often dampening economic growth while pushing prices upward. Recent escalations and subsequent truces with China highlight how volatile this situation remains.

Businesses in sectors like electronics, automotive, and manufacturing face increased costs, forcing tough choices—either absorb losses or pass costs onto consumers. This instability impacts corporate profitability and stock valuations, notably affecting sectors heavily reliant on international supply chains.

How is the Stock Market Reacting?

The S&P 500, always sensitive to economic uncertainty, has felt the pinch. Initially, markets dipped sharply with each tariff announcement, reflecting investor anxiety. However, the recent tariff truce led to a brief rally, showcasing just how closely investors are watching trade developments.

Specific sectors like technology and industrial manufacturing have faced challenges due to disrupted supply chains and higher input costs. Conversely, domestic producers of steel and aluminum have enjoyed temporary benefits from protective tariffs.

Bitcoin’s Role Amidst Turmoil

Bitcoin's behavior during recent tariff escalations has been intriguing. Initially touted as digital gold, Bitcoin has often mirrored traditional risky assets in the short term, dropping alongside stocks amid uncertainty. Interestingly, Bitcoin quickly recovered following the recent tariff truce announcement, underscoring its volatile yet responsive nature to global economic events.

However, long-term uncertainty around tariffs and currency instability could enhance Bitcoin's appeal as a decentralized store of value, especially if economic frictions persist or escalate.

Money Supply (M2) and Inflation Dynamics

One critical area of economic observation is the dramatic fluctuation in the U.S. money supply (M2). Post-pandemic, M2 ballooned to historic levels, fueling inflation that soared to multi-decade highs. Since then, the Federal Reserve's monetary tightening has shrunk M2, cooling inflation significantly.

Currently, we see signs of stabilization in M2, suggesting that inflation will continue moderating. However, tighter liquidity could slow economic growth, creating a challenging balancing act for policymakers.

The Bond Market: Why is the Fed Buying Bonds?

The bond market has also been notably turbulent. High government borrowing coupled with reduced liquidity in bond markets has led to elevated bond yields. To stabilize market conditions, the U.S. Treasury, supported by the Fed, has initiated bond buyback programs aimed at enhancing liquidity and preventing market dysfunction.

While not directly quantitative easing (QE), these measures underscore concerns around bond market fragility and the necessity of maintaining stable financing conditions, especially given high levels of government debt.

Expecting a Fed Rate Cut?

After a prolonged period of aggressive interest rate hikes, markets now anticipate moderate Fed rate cuts later in 2025. The Fed remains cautious, emphasizing cuts will depend on declining inflation and slower economic growth. This cautious approach is expected to gradually ease borrowing costs, providing mild relief to markets and potentially stabilizing economic growth.

Outlook for the Rest of 2025

Our current macroeconomic forecast suggests moderate U.S. economic growth (around 1.8%), continued disinflation towards around 3%, and a cautious Fed stance aimed at navigating a soft economic landing. However, risks remain substantial. A resurgence in tariff tensions or persistent inflation could disrupt this delicate equilibrium.

For investors, this means staying flexible and informed. Opportunities will likely arise amid volatility, especially if trade tensions ease sustainably or if the Fed shifts policy significantly. However, caution remains crucial due to potential downside risks from tariffs and tighter financial conditions.

Final Thoughts

Navigating markets in 2025 demands careful monitoring of global events, tariff policies, and Fed decisions. At Lorry Capital, we're committed to keeping you informed and prepared to make strategic investment decisions amidst these shifting tides.

Stay tuned, stay informed, and as always, we're here to navigate this journey together!

Warm regards, The Lorry Capital Team