Category: Chart of the Week

Measuring the Impact of Tariffs on Equity Performance

This week’s chart shows two indices created by Morgan Stanley that seek to track the performance of companies with different relationships to the global trade landscape. The first index, called “Tariff Exposed,” represents a group of stocks that are more negatively impacted by tariffs due to supply chains and revenue streams that are global in nature. The second, dubbed “Tariff Insulated,” tracks a basket of firms that are insulated from recent tariffs (or have mitigation strategies related to tariffs in place) due to the nature of their operations. The two indices are global, sector-neutral relative to each other, and include names across the Consumer Cyclical, Consumer Defensive, Industrials, Technology, Health Care, and Basic Materials spaces. Some of the largest constituents of the Tariff Exposed basket are Target, Deere & Co., Dell Technologies, and Intuitive Surgical. Tariffs have served as a headwind for these businesses thanks to their heavy dependence on imports (Target and Dell Technologies) and reliance on export markets (Deere & Co. and Intuitive Surgical). On the other hand, some of the largest constituents of the Tariff Insulated basket are Ulta Beauty, Levi Strauss, Domino’s Pizza, and McDonald’s. These companies have been less impacted by new trade restrictions thanks to localized sourcing of ingredients (Domino’s Pizza and McDonald’s) and diversified supplier bases (Ulta Beauty and Levi Strauss).

Since the start of 2025, the Tariff Exposed and Tariff Insulated indices have returned roughly -14.1% and -0.8%, respectively, as of this writing. Going forward, it is imperative that investors remain diversified across their equity portfolios to ensure exposure to those companies that can weather the tariff-induced storm and those that may be poised to bounce back as trade negotiations progress.

Growth to Gold: Wall Street’s Favorite Trade Just Changed

According to the most recent Bank of America Global Fund Manager Survey, gold has surged to the top of the list of the most crowded hedge fund trades, with 49% of respondents identifying a long position in the metal as the highest conviction play on Wall Street. This represents a significant shift in sentiment, as April marks the first month in two years that a long position in the Magnificent Seven technology stocks (i.e., Apple, Amazon, Google, Microsoft, Meta, NVIDIA, Tesla) did not top the list. This pivot reflects rising caution across investors given ongoing market volatility, persistent inflation, and uncertainty around future monetary policy. The move into gold, a traditional safe-haven asset as described in the last edition of our Chart of the Week series, suggests that fund managers are becoming increasingly defensive and seeking protection from potential further deterioration in risk assets. Indeed, the Magnificent Seven basket has fallen roughly 23% on a year-to-date basis as of this writing, and now just 24% of fund managers believe it to be the top trade given elevated valuations and the extent to which these companies are exposed to a global supply chain that has fractured due to tariffs. Conversely, gold has surged more than 28% since the start of 2025 given heightened risk aversion on the part of investors. It is important to remember, however, that gold is not necessarily a viable long-term investment given its lack of cash flows and the extent to which speculation drives its price.

What’s Your Haven? | Who is the “Godfather” of the Bond Market?

No, you are not seeing double. This very special edition of our chart of the week series comes with an added bonus chart with the goal of highlighting key dynamics within fixed income markets that have been top of mind for investors in recent weeks. Read on and enjoy two charts for the price of one!

 

What’s Your Haven?

Fixed income has historically provided three benefits to investors: Income, diversification, and liquidity. U.S. Treasuries are a pure form of diversification given their limited risk with the 10-year Treasury serving as a bellwether, and these securities are viewed by many as safe havens during periods of market stress. Historically, Treasuries and equities have tended to exhibit low to negative correlations. However, much like returns and volatility, correlations are time-varying. For instance, the historical relationship between stocks and bonds broke down in the aftermath of the COVID-19 crisis, when accommodative monetary policy led to higher levels of inflation and the two asset classes moved in tandem. The same pattern took hold over the last few weeks amidst tariff-induced market volatility, with correlations between stocks and Treasuries increasing and hampering traditional diversification benefits. With Treasury rates recently trading like risk assets, there are other safe haven assets to which investors have turned for insulation against volatility.

Gold is often referred to as a safe haven asset given its status as a precious metal that is viewed as a store of value and a hedge against inflation. Over the last few years, gold has offered favorable diversification relative to risk assets with inflation running hot. It also tends to do well when fears are high. To that point, with the S&P 500 Index down more than 8% on a year-to-date basis, spot gold prices have risen from $2,625/oz to $3,312/oz.¹ All of this being said, gold is not necessarily a good investment as it does not provide cash flows and its price movements are largely driven by speculation. Additionally, the correlation of gold to equities fluctuates over time from somewhat positive to somewhat negative, with material variations over longer investment horizons.

Some currencies are also viewed as safe haven assets, with the classic example being the yen given Japan’s stable political system and ample liquidity. The yen has rallied with stocks down this year, moving from ¥157.20/$ to ¥142.66/$. Diversification benefits from the yen have historically been better than those provided by gold, but they have also waned somewhat in recent years. Currencies also suffer from some of the same issues as gold, including a lack of cash flows and price speculation. As such, most currencies are generally best used as tactical hedges as opposed to long-term portfolio constituents.

Diversification is a critical component of portfolio construction and while Treasuries have historically served as safe havens during market volatility, other assets have offered more compelling diversification benefits in recent weeks. However, the viability of these assets (i.e., gold and currencies) as outright replacements for Treasuries in portfolios is questionable given the points made above.

¹ Bloomberg as of April 16, 2025

 

Who is the “Godfather” of the Bond Market?

Current global trade tensions beg the question: Can foreign holders of U.S. debt manipulate the Treasury market? Indeed, some have speculated that China sold Treasuries to put upward pressure on yields last week to retaliate against the U.S. for its new tariffs (i.e., causing the U.S. to borrow at higher rates). This action, however, would likely be painful for China as well. If news of significant Treasury sales by China were to circulate, yields would likely spike, and the value of its remaining holdings would fall. The U.S. also has tools to combat such a move, including quantitative easing (i.e., bond purchases) designed to return yields to normal levels. Ultimately, a retaliatory Treasury sale would be a huge risk to China, not to mention the fact that China’s holdings tend to be of a shorter nature and recent pressure has mostly been on the long end of the curve (which sold off by around 50 basis points last week). Might another country be responsible for this movement?

While some Japanese politicians have lobbied for using its country’s Treasury holdings as a tool in trade negotiations, the ruling party has repeatedly emphasized that Japan should not sell its Treasuries to rile the United States. So, while Japan has indeed been a notable seller of U.S. Treasuries in recent weeks, these sales have likely been influenced by other factors. For instance, Japanese life insurers are major holders of long-dated U.S. Treasuries, and these entities could be rotating out of Treasuries given a cautious stance on U.S. policy. Another potential reason for recent sales is Japanese pension plans rotating into European bonds.

In summary, technical signals from non-U.S. investors can certainly influence the Treasury market, but it is unlikely that these players could engage in outright market manipulation. At the end of the day, the Federal Reserve can pull strings to combat Treasury-related turmoil and remains the godfather of the bond market.

The Volatility Roller Coaster

Earlier this week, Marquette published a newsletter detailing the ongoing market volatility caused by the Trump administration’s recent tariff rollout. Indeed, equity markets have reacted sharply to the new trade landscape, with the S&P 500 Index having fallen roughly 11.0% from its February peak as of this writing. While a significant portion of these losses came late last week, this week has seen even more extreme market fluctuations as investors struggled to assess the impact of new trade restrictions on security prices and the global economy. Specifically, the S&P 500 Index opened lower on Monday morning before surging amid rumors that the White House was considering a pause on its reciprocal tariff measures. The Trump administration quickly denied these rumors, and the benchmark would later turn negative before ending the day slightly up from its prior close. Markets opened sharply higher yesterday but steadily lost ground due to souring sentiment and a lack of progress on trade negotiations. Today, equity markets opened slightly lower before skyrocketing after an official announcement of a 90-day pause for reciprocal tariffs on non-retaliating countries. All told, Monday, yesterday, and today saw staggering intra-day price changes in the S&P 500 Index of roughly 8.5%, 7.3%, and 10.8%, respectively (in absolute value terms).

As this week’s chart indicates, price swings of this magnitude have only been exhibited during the most extreme periods in U.S. equity market history, including the Black Monday Crash of 1987 and the Global Financial Crisis. As such, it is imperative that investors navigate the current environment with a high degree of prudence and caution, especially given the likelihood of continued volatility as trade negotiations proceed. It is also helpful to remember that investors have historically been well compensated for bearing equity risk over multi-year periods, and that short-term fluctuations are the price of positive long-term returns. Marquette continues to closely monitor dynamics within global markets and will provide timely updates accordingly. Please reach out to us with any questions.

Europe on Defense

The first 100 days of a presidential administration are typically scrutinized closely as the public develops a sense of the new government’s agenda and top priorities. The second Trump administration is certainly no exception, and the recent flurry of executive orders and tariff proposals has caused significant uncertainty for policymakers and financial markets alike. Trump’s handling of the Russia-Ukraine War has had an especially notable impact. In March, the Trump administration suspended aid to Ukraine after a tense meeting with Ukrainian President Volodymyr Zelenskyy. That decision elicited a strong response from European leaders, who now have a newfound sense of urgency when it comes to rebuilding the continent’s defense capabilities. In recent weeks, the European Commission, the executive branch of the European Union, announced its “ReArm Europe Plan,” complete with a white paper entitled “European Defense Readiness 2030.” These documents emphasize the need for Europe to bolster defense spending and outline an investment plan to do so.

Global markets took note of this dynamic well before the unveiling of the ReArm Europe Plan, with European defense stocks surging as the continent’s relationship with the Trump administration has deteriorated. To that point, the STOXX Europe Total Market Aerospace & Defense index returned roughly 28.9% in the first quarter, with noteworthy contributors including Rheinmetall, a German arms manufacturer, the French military aircraft manufacturer Dassault Aviation, and Leonardo DRS, an Italian aerospace and defense specialist. This is in striking contrast to the market leaders of 2024, including U.S.-based tech giants such as NVIDIA and Microsoft. The Magnificent Seven basket of stocks have returned roughly -16.0% so far in 2025.

While investors are understandably enthusiastic about the prospects of defense spending jumpstarting the European economy, making these defense goals a reality will not be an easy task, especially for European countries such as France that are heavily indebted with a highly taxed citizenry. One thing is for certain: The market’s response to recent defense initiatives in Europe illustrates the importance of maintaining a diversified investment portfolio, as it is difficult to predict the catalysts that will drive performance reversals like the one detailed above.

Checking in on Bitcoin’s Fair Value

In May of 2024, we published a Chart of the Week titled “Is Bitcoin Fairly Valued?” At the time, bitcoin and the broader digital asset space demonstrated mixed performance amid heightened market volatility, shifting liquidity conditions, and geoeconomic uncertainty. Recognizing the challenges in determining bitcoin’s fair value, we applied standard valuation principles to estimate bitcoin’s fundamental value at that time. While bitcoin and the broader digital asset space have once again exhibited mixed performance amid a shifting macroeconomic backdrop, much has changed over the last year and recent developments suggest that a reassessment of bitcoin’s fair value could be timely.

To better understand why this reassessment could be relevant for institutional investors, here is a brief and non-exhaustive recap of the key developments in the U.S. crypto space this year:

  • On January 23, the Trump administration issued Executive Order (EO) 14178, Strengthening American Leadership in Digital Financial Technology, signaling a new approach to digital assets and revoking the frameworks and directives established by the Biden administration.
      • Within 180 days, the President’s Working Group on Digital Asset Markets, currently chaired by David Sacks, will evaluate and recommend proposals for a federal framework to govern the issuance and operation of digital assets.
  • On February 5, FDIC Acting Chair Travis Hill and Federal Reserve Governor Michelle Bowman released statements signaling the ongoing reassessment of their organizations’ postures toward the crypto industry — sentiments echoed in recent weeks by officials from the Treasury, DOJ, and SEC.
  • On March 6, President Trump signed the EO to establish a U.S. Strategic Bitcoin Reserve and a separate Digital Asset Stockpile; both to be administered and maintained by the Department of the Treasury.
      • Both are to be initially funded with assets seized or forfeited in criminal and civil cases.
      • Without further executive or legislative action, additional Stockpile assets can only be acquired through forfeiture proceedings and civil money penalties imposed by a government agency.
    • The Secretary of the Treasury and the Secretary of Commerce may develop budget-neutral strategies for acquiring additional bitcoin.
  • As of March 24, 20 states have active legislation advancing the establishment of digital asset reserve funds or diversification of existing public funds with prominent digital assets — with some proposals specifying potential allocations up to 10% of fund assets.

Unsurprisingly, crypto markets responded enthusiastically to the news. By the end of January, the MVDA 10 Index and the MSCI Global Digital Asset Index were both up roughly 10% as bitcoin traded north of $100,000. Then, February arrived, bringing a notable shift in broad market sentiment and volatility, causing digital asset prices to fall alongside public equities. By the end of February, bitcoin was down roughly 18% while some broad crypto indices were down as much as 28%. So where does bitcoin currently stand?

Applying the discounted cash flow (DCF) method used in our prior analysis, bitcoin’s fair relative value range¹ is illustrated above in light teal, with its upper and lower bounds highlighted, respectively, in orange and green. While bitcoin appears to have closed February at undervalued levels, as of March 24, bitcoin appears to be slightly below and advancing toward its fair value range. That said, it is important to clarify that this point-in-time DCF method is just one of several potential valuation approaches, and other estimates may vary. Valuations for both floating fiat currencies and cryptocurrencies are dynamic, constantly adjusting to inflation, nominal yields, and broader macroeconomic conditions. Going forward, future inflation trends and market dynamics will provide further opportunities to validate this fundamental approach.

1The discounted terminal values of bitcoin are based on a discounted cash flow model that incorporates U.S. Treasury yields, inflation rates, and imputed risk premiums. 

The Changing Current

The impressive strength of U.S. equities in recent years has drawn significant investment from both domestic and international investors, but a closer look reveals a shift in how investors are attaining exposure to the asset class. The chart above illustrates the cumulative net asset flows for various U.S. equity investment vehicles since 2009 and indicates that a growing number of investors are embracing passive strategies. To that point, more than $2.5 trillion has flowed from active to passive management in the last 15 years, with most of the dollars having been directed toward ETFs.

There are many factors that have contributed to this trend. First, mobile brokerage platforms and improvements in technology have made investing more convenient and cheaper for retail investors, with thousands of low-cost products now available that track major stock indices like the S&P 500. Second, many institutional investors have reallocated portions of their U.S. equity portfolios to passive strategies to save on fees, while seeking higher returns via active management in other asset classes like private equity. Additionally, many active U.S. equity strategies have struggled to keep pace with the broad market. Specifically, just 15% of active U.S. large-cap managers have outperformed the S&P 500 over the last decade due a small handful of companies (i.e., the “Magnificent Seven”) having been responsible for an outsized portion of U.S. equity market returns in recent years. This trend also aligns with what is often referred to as the “paradox of skill,” which states that as the absolute level of skill in a space increases, the relative skill among the players in that space often decreases. While this framework has been applied to everything from the NBA to chess, it may also be partly responsible for the decrease in the return premiums earned via active management in the U.S. equity market. If true, this trend poses interesting questions related to whether similar alpha compression will occur in fast-growing spaces like private markets.

Uncertainty Fuels Meltdown in U.S. Equities

Entering 2025, investors were overwhelmingly bullish on the outlook for U.S. equities. Positive sentiment was fueled by the perceived benefits of the incoming administration, specifically the likelihood for pro-business policies and looser regulation. These expectations drove the Russell 2000 and NASDAQ to fresh all-time highs post-election, although some of this exuberance was dampened following a more hawkish tone from the Federal Reserve in mid-December. Since his inauguration, Trump has been outspoken on tariffs and government spending, but the gravity of these measures, compounded by inconsistent implementation, has led to market uncertainty. As a result, the VIX, a measure of market volatility, reached a post-election high on March 10.

Concurrent with the spike in volatility, segments of the U.S. equity market have fallen into correction territory, defined as a decline greater than 10% from recent highs. Small-cap equities, as measured by the Russell 2000, have declined almost 17% from their high in November 2024. Small-cap equities are more economically sensitive, but underperformance has been compounded by depressed earnings. Large-cap equities, as measured by the S&P 500, achieved a new all-time high in February, but have flirted with correction territory in March, down over 9%. A shift in investor sentiment continues to weigh on U.S. equities as Trump acknowledged the potential for further volatility without ruling out the possibility of a recession. Additionally, the market darlings of the past two years, the Magnificent 7, have not been immune to market volatility, as rich valuations may make these companies more susceptible in a market pullback. This cohort of companies has declined 20% since an all-time high in December 2024, as companies like Tesla have erased all of their post-election gains.

Expectations for the U.S. equity market have fallen short thus far in 2025. As the new administration navigates the path forward, the impacts of policy decisions on the economy remain uncertain, so volatility may persist. Although volatility can be painful and is likely to continue, a disciplined and diversified approach that focuses on long-term performance is still the best recipe for portfolio success.

School’s Out?

While the United States has historically prioritized public spending on education more than other developed countries, there has been a recent convergence in U.S. education expenditure as a percentage of GDP with that of other countries in the OECD, a group of mostly developed and democratic nations. Specifically, in 2000, the U.S. spent 6.1% of total GDP on education, which was notably higher than the OECD average of 4.9% at that time. That said, the U.S. figure dropped to 4.7% in 2016, which was slightly below the 4.8% OECD average that year. Based on this trend, it should come as no surprise that U.S. students are beginning to fall behind their global peers in key academic areas. To that point, U.S. K-12 students ranked 12th and 28th in science and math, respectively, out of 37 OECD member countries in 2022 according to Pew Research. The U.S. average score for math fell by a whopping 13 percentage points between 2018 and 2022 alone.

While the challenges faced by U.S. students due to the COVID-19 pandemic were significant, the fact that U.S. now spends roughly the same as other developed nations (as a percentage of GDP) has certainly contributed to these lackluster scores. Going forward, a renewed focus on education-related spending and outcomes should serve the U.S. well, as a robust public education system helps drive economic growth, stability, and innovation.

Optimism is Pessimism?

In a 2016 redux, Donald Trump’s victory in the November election kicked off another wave of economic optimism across CEOs and small business owners alike. To that point, the Bloomberg CEO Confidence Index, which measures U.S. CEO confidence in the economy one year from now on a scale from 0 to 10 (10 being most confident), and the National Federation of Independent Businesses Small Business Optimism Index, a composite of ten seasonally-adjusted components based on the outlook of roughly 620 NFIB members, are two of the primary ways to gauge the economic outlook of U.S. businesses. Trump’s pro-growth policy goals of corporate tax cuts and deregulation have spurred an uptick in both indices, although higher business confidence may further delay meaningful rate cuts from the Federal Reserve.

With equity market momentum and increased CEO confidence, there is expected to be little disruption in hiring and spending by larger companies within the U.S., which should translate to continued economic strength. That said, the increase in small business confidence may be a more prescient indicator of future growth. Small businesses, which employ upwards of 50 million domestic workers and bring in roughly $16 trillion in annual revenue, are the engine that drive the U.S. economy, meaning as small business optimism increase, spending, investment, and hiring could increase significantly as well. Combine these dynamics with a recent 100 basis point reduction in benchmark interest rates, and economic growth may be poised to remain robust. While this would be largely positive for the U.S., it may be viewed as a reason for pessimism by the Federal Reserve. Specifically, as the Fed continues to battle sticky inflation (the latest CPI print came in hot at 3.0%), a higher growth environment would make it harder to continue to cut interest rates without causing inflation to reaccelerate. Recent data indicate just one to two rate cuts from the Fed for the rest of 2025, and if the U.S. economy sees higher levels of growth and inflation in the near term, future cuts may have to remain on ice.