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Donna Cournoyer
In Financial Planning

Pass the SALT, and More on Taxes

Lawmakers are considering new bills to make several provisions of the TCJA permanent and to introduce additional modifications to tax law. The following article provides an update on new tax legislation, and presents an example of how raising the SALT cap could provide a measure of tax relief.

Tax policy is now at the top of the agenda for the US Congress.

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the US tax code, including lowering income taxes for many. But much of the TCJA is set to expire at the end of 2025.

The House narrowly passed their version of a new tax bill, entitled “The One Big Beautiful Bill Act” on May 22. The Senate is now debating their version. Identical legislation must pass through both chambers before becoming law.

Here are some of the key provisions of the House version of the new tax law:

 Makes permanent the current 7 individual federal income tax brackets

  • Bumps up standard deduction by $1,500 in 2025; and $1,000 per year in future years
  • Provides an additional standard deduction of $4,000 for those over 65 until 2028; phases out for individuals earning above $75,000 and couples earning above $150,000
  • Increases child tax credit to $2,500 per year for next four years
  • Introduces new kind of child savings account (“Trump Savings Account”) designed to help parents save, where parents can contribute $5,000 annually in after-tax dollars until child reaches age 18
  • Expands estate tax exemption to $15 million per person / $30 million per couple
  • Raises cap for the State and Local Tax (SALT) deduction to $40,000 per household starting in tax year 2025 from the current $10,000

We will report more fully on the tax changes when legislation is finalized.

However, since the increase in the SALT cap, if it does pass, likely will result in more people itemizing their taxes (versus taking the standard deduction), and could yield significant tax savings, we’ve provided an example of how it may work, below.

The House bill increases the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for taxpayers earning up to $500,000. The cap and income threshold would increase by 1% annually over the next ten years under the proposed bill.

The SALT deduction allows taxpayers who itemize to deduct certain state and local taxes—such as income and property taxes—from their federal taxable income.

The $10,000 cap was introduced in 2017 under the TCJA and has been a point of contention, particularly for residents in high-tax states where state and local taxes often exceed this limit.

If enacted, this change in the SALT cap could provide substantial tax relief for taxpayers who have significant state and local tax liabilities.

Homeowners with high property taxes or individuals with substantial state income taxes could see a notable reduction in their federal taxable income, potentially lowering their overall tax burden.

As an example, let’s assume that a family with annual income of $275,000 has the following expenses:

  • Property taxes: $18,000
  • State income taxes: $10,000
  • Mortgage interest: $8,000
  • Charitable contributions: $12,000

Since their property and state income taxes are currently subject to the SALT cap of $10,000 under the current law, their deductions would total $30,000:

  • SALT: $10,000
  • Mortgage interest: $8,000
  • Charitable contributions: $12,000

Since their total itemized deductions of $30,000 would be less than the standard deduction, they would take the standard deduction of $33,200 in 2025 (assuming no change from the current law).

If the SALT cap is increased to $40,000, this same family would be able to deduct all their property and state income tax, and they would have the following deductions:

  • SALT: $28,000 ($18,000 property plus $10,000 state income tax)
  • Mortgage interest: $8,000
  • Charitable contributions: $12,000

This family would then be able to itemize $48,000 in deductions, giving them an additional $14,800 in deductions. If they are in the 24% tax bracket, the increased SALT cap would save them $3,552 in Federal taxes.

While the House has passed their bill, it still requires approval from the Senate, where the outcome is uncertain due to differing views on fiscal policy and tax equity.

Therefore, while the proposed changes could offer tax advantages for some, they are not yet law.

We will continue to monitor the progress of this legislation and assess its implications for your individual tax planning strategies.

-RK

Donna Cournoyer
In Market Updates

May 2025 Market Recap: Game On

In Wayne’s World, the early 1990s cult-classic movie, protagonist Wayne and his sidekick Garth play street hockey on the neighborhood thruway. Automobiles pass frequently. Wayne and Garth don’t mind.

Street hockey provides an interesting model for thinking about financial markets. The cadence of shoot-score / shoot-miss / pause / move net off the street-move net back onto the street / restart is all part of the contest.

At times there are scores (when the market goes up). Other times, there are misses (when the market goes down). And, once in a while, external factors alter the field (for example, new and confusing government policy changes).

But the game continues under all conditions and players have an easier time if they take the changes in stride and continue to move forward.

Drawing the analogy to today’s situation, we’ve just passed through a miss / pause / net off the street phase. The net is now back in the road and the play has restarted.

And what of all the concerns about tariffs?

Some of us remain gravely concerned about tariffs, and also about unconventional (and even radical) policy approaches.

But many investors seem to think that Trump learned a lesson back in April, when the rout in stocks, bonds, and the US dollar forced a suspension of much of the global tariff rollout.

The financial market consensus reached in early May was that the final tariff plan is likely to be far more modest than the initial plan revealed on “Liberation Day” in early April, which has cleared the way for a sizable stock market rally.

Also, earnings reported by large US companies for the first quarter of 2025 were generally better than feared, and recently released economic data has exceeded expectations.

Gloom was pervasive in April, but lifted a bit in May as results haven’t been so bad.

A corollary to earnings is the confidence evidenced by company managers through their willingness to continue to spend money on current projects, and plan for new projects that will support and grow their businesses.

According to information compiled by Bloomberg, most of the largest publicly-traded companies (71%) that provided guidance after Trump’s early April bombshell have decided to maintain their capital expenditure outlook.

About 8.5% of firms have increased their spending plans, while 18% have revised them lower; 3% have withdrawn guidance. These results show that business confidence largely remains intact.

Some moderation (or at least temporary reprieve) in the tariff regime, as well as business profitability holding up and business spending plans remaining mostly intact, paved the way for “Game On” in the financial markets.

The old saying “sell in May and go away” was a dud in 2025, because last month was the best performing May in a quarter century.

The chart below shows monthly stock market performance for each May going back to 1990.

Source: Bloomberg

A second old saying, “markets climb a wall of worry” is holding true for 2025. Uncertainty has been outsized, but nonetheless, most asset classes at home and abroad have now registered positive returns.

Here’s how the performance of various asset classes stacked for the month of May and thus far in 2025:

Source: Moore Financial Advisors & Morningstar

-RK

Donna Cournoyer
In Reading Recommendations

Reading Room: Common Sense Investing

A cornerstone to successful investing is the application of common sense.

The founder of The Vanguard Group, John C. Bogle, believed this. The term ”common sense” appeared frequently in his writings, across twelve books and numerous essays, commentaries, and speeches.

A few of the tenants of common sense investing that Bogle espoused:

  1. Time is Your Ally: compound interest works best when paired with a long-term perspective; investors should avoid short-term noise and focus on long-term growth
  2. Diversification is Key: by owning a wide swath of the market, investors reduce the risk of being overly exposed to individual securities or sectors
  3. Don’t Try to Outguess the Markets: avoid speculative strategies and favor predicable, rules-based investing
  4. Cost Matters: try to keep costs associated with investing as low as possible
  5. Focus on What You Can Control: investors can’t control the market, but they can control how they react to market events, how they allocate their portfolio, and how long they stay invested

For those interested in diving deeper into Bogle’s work, The John C Bogle Reader is a good launching point. It combines three of Bogle’s most important books: Common Sense on Mutual Funds; Don’t Count on It! and The Little Book of Common Sense Investing.

I recognize that digesting 1,874 pages of financial subject matter presents a lot of nourishment, and may be a meal enjoyed by some, but not all.

It may suffice readers to know that Bogle’s common sense approach, to which we adhere, continues to ring true: keep costs as low as possible, diversify, and stay invested.

Beyond his financial and business prowess and advocacy for the Main Street investor, Bogle was a thoughtful and empathic human being.

If you enjoy one-to-one interviews and would like to hear Bogle in his own voice, check out this link.

Friend of the firm David Freudberg, who has a long and successful history of producing content for public radio, had the opportunity to meet with Bogle twice. The link above was from his 2014 interview at the Vanguard offices outside of Philadelphia in 2014.

For more of David’s work, which I highly recommend, check out Humanmedia.org and David’s weekly podcast Humankind.

-RK

Donna Cournoyer
In College Planning

A Message for the Class of 2025

The following article from our colleague and college financial advisor Donna Cournoyer is addressed to graduating high school seniors.

Your upcoming graduation from high school is a big deal- a REALLY big deal. Congratulations!

Now is the time when one chapter closes as you prepare for another. While it’s quite exhilarating, it can be a bit overwhelming, too. Don’t worry – you are not alone. Your future college classmates are also preparing for the transition this coming fall.

Here’s how you can get ready for college, with a few helpful tips from students who’ve been where you are:

Embrace Your Independence

College is a big step toward becoming your own person. You’ll be managing your own time, choices, and responsibilities – everything from planning your meals, your schedules, and of course your classes.

“Learning to do laundry before I moved in saved me from a lot of headaches—and colorful T-shirts,” says Emma, a sophomore at the University of Vermont. “College felt less overwhelming once I stopped waiting for someone to tell me what to do and started figuring things out for myself.”

Start with something practical this summer, like creating a budget, and managing any money you make by working a part-time job. Save what you can for spending money this fall.

Keep Your Study Habits Sharp

In college, it is likely that your classes will be moving faster and be more in-depth than high school. It is helpful to find what study methods help you most, such as group sessions, flash cards, or digital tools.

“In college, no one checks if you’ve done the reading. You’re expected to show up ready to talk about it,” says Jordan, a first-year student at a liberal arts college. “Learning how to study smarter—not longer—was a game changer.”

Start Making Connections

Start now. Don’t wait for move-in day to meet people. This helps take some of the fear of the unknown out of the equation, if you make a few new friends before you meet in fall.

Join the social media groups your school has set up for incoming freshmen. Message your roommate, attend the virtual meetings to meet some of your classmates.

“A girl I met on the college Discord server ended up being one of my best friends. We bonded over our love for Taylor Swift before classes even started,” says Aisha, a freshman at a state university.

Get Practical

From having health insurance cards to dorm shopping, there are a lot of logistics to tackle before move-in day. Make a list (or more), and don’t be afraid to ask older students what they wish they had packed- or left at home!

“I brought too many clothes and not enough extension cords,” laughs Max, a junior.

Also, know how to access your student portal and make sure your paperwork, such as immunization records, financial aid, and payment plans are squared away.

It helps to see some familiar faces when you step on campus.

Prioritize Your Well-Being

College life can be amazing, but also stressful. Make your mental health a priority. Get familiar with campus resources like counseling centers, academic support centers, student activities centers. Even wellness apps can help.

“I didn’t expect to feel homesick, but I did,” shares Leah, a second-year student. “Talking to someone—even a campus peer counselor—helped a lot.”

Remember, you are growing, you don’t need to have everything figured out! That is what college is for.

Final Thoughts

Summer this year is more than a break: it is really a launching pad. Take time to rest, plan, and dream. You are heading into one of the most impactful periods of your life. Full of life-changing experiences, discoveries and connections that will last your lifetime.

You, the Class of 2025, have already made it through a lot! Now is your time. Go out, learn, connect and experience the world around you.

“College will help you realize who YOU are. Your life will begin to take shape, and the meaning of your life will start to emerge.” -Donna

-DC

Donna Cournoyer
In Investment Strategy

Hold ’em, Don’t Fold ’em

Kenny Rogers revealed his ideas about what to do at the poker table when he sang; “you got to know when hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.”

Roger’s wisdom may ring true for gamblers, but it is much less useful for investors. John C. Bogle’s ideas and approach to investing are more apt to yield positive long-term results.

One of the four “investment giants” of the twentieth century (according to Fortune Magazine), Bogle was a founder of The Vanguard Group and was known for doing well by Main Street.

He had a strong conviction that focusing on the long term was the best approach for individual investors.

Bogle appreciated the classics, and was fond paraphrasing Shakespeare’s MacBeth, asserting: “the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing.”

He went on to say: “Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”

During periods such as April, when the ebbs and flows of the financial markets are extreme, it’s important to remember Bogle’s words of wisdom.

In theory, it’s easy to get on board with what Bogle is saying.

In practice, however, it is difficult to “not to pay that much attention” when stock prices are gyrating and when you are witnessing daily declines in your portfolio’s value.

Since April’s mini-panic has subsided, investors may have an easier time considering the following, which support the “hold, don’t fold” principle:

  1. Large stock market declines are typically closely followed by large stock market rallies.
  2. Selling during today’s downswing can be detrimental, because it increases the chances that you’ll miss the benefits of tomorrow’s upswing
  3. Bear markets are infrequent (but not rare) and are typically unpredictable. Preparing for a rough ride in the near-term, while anticipating a smooth ride over the long-term, is a prudent approach.

Below are charts, with additional commentary, that illustrate these points.

Worst Days and Best Days Tend to Cluster Together

This chart shows the worst 50 days and the best 50 days in the stock market from 1997 through 2024, courtesy of Goldman Sachs Asset Management.

Source: Goldman Sachs Asset Management

GSAM says the time between the worst day in a drawdown and the best day of the subsequent recovery is often as little as 2-8 days.

If this chart were to be extended into 2025, early April would have featured prominently, when large company US stocks fell by nearly 5% on 4/3 and 6% on 4/4 – then shot up by 9% on 4/9.

If you’re tempted to sell stocks after a big market decline, keep this chart in mind. If you sell on the downswing, you’re likely to miss the upswing.

The 10 Best Days of Each Year Make All the Difference

Here’s another lens on the good days / bad days concept: since 1990, missing just the ten best trading days each year would have turned the S&P 500’s average positive return of +15.1% into an annual loss of -18.0%, on average.

Source: Goldman Sachs Asset Management

The chart above extends back to 2000, and shows actual annual returns in dark blue, paired with what annual returns would have been if investors missed the ten best trading days of the year.

The lesson: hold through the downs and the ups. Selling when the market is down means you run the risk of missing recoveries, which can be detrimental to your long-term wealth.

As hard as it may be psychologically to persevere when the outlook is gloomy and stock prices are falling, it most often is the right thing to do.

Markets Reward Long-Term Investors

The next two images show that being in the markets for the long haul is the best way to handle volatility, which is a feature of the stock market.

This table, courtesy of Capital Group, maps out the nine largest market declines during the past two decades, and puts what just occurred in April, labeled “Trump Tariff Tremor” into context.

Source: Capital Group

The events in purple font are corrections, where the stock market (S&P 500 Index of large company US stocks) has declined by between 10% to 20%.

Most of the time in instances where the market corrects, the decline is quick and sharp, and stocks recover quickly.

The “Trump Tariff Tremor” in black font a significant event, and the market activity was in line with other corrections. While stocks haven’t fully recovered to their most recent peak, the upswing from the April 8 “bottom” has been 14% as of May 2.

The events in green font are more severe bear markets, where the stock market has declined by more than 20%.

Recovery typically takes some time after the bottom of a bear market is reached. But in both types of down markets – Corrections and Bear Markets – long-term investors are rewarded for staying the course.

The last chart, also courtesy of Capital Group, is a complement to the previous table and shows the path of the S&P 500 Index of large-company US stocks for the past 20 years.

Source: Capital Group

The shaded areas map out the bear markets in green and the corrections in purple.

Through it all, the US stock market return has averaged about 9.25% per year. A $1,000 investment on January 2004, would have appreciated to approximately $5,888 over the twenty-year period.

Hopefully, this data can help you recognize the trees (short-term), enable you to see the forest (long-term), and support your resolve to stay committed to your investment strategy and your financial plan.

-RK

Donna Cournoyer
In Market Updates

April 2025 Market Recap: Trade Policy U-Turn

For drivers, a car U-turning on busy roadway is universally viewed as negative. For investors, the recent policy U-turn by the Trump administration on its busy tariff agenda was universally viewed as positive.

As the tariff announcements came fast and furious in early April, the financial markets took another leg down.

During four trading days early in the month (April 3rd – 8th) US large company stocks dropped by 12%.

This downdraft, on top declines registered in the first quarter, brought the cumulative drop in stocks close to a bear market – down 19% from the most recent high on February 19.

Then, President Trump said he’d pause tariffs on dozens of countries for 90 days after coming under intense pressure from business leaders and investors to reverse course.

On April 9, the stock market delivered a 1-day rally of 9% following that announcement.

As of the end of April, here’s how the situation stood with regard to tariffs:

  • A 90-day pause on so-called “reciprocal” tariffs (apart from a 10% universal tariff)
  • Further tariff exceptions for computers, smartphones and electrical equipment
  • Some short-term exclusions from the 25% tariffs on imported vehicles and auto parts under consideration
  • Conversely, the Administration has ratchetted up tariffs on China to 145%
  • New levies on imported pharmaceuticals, lumber and semiconductors are expected in coming months

Beijing’s countermove was to raise tariffs on all US goods imported into China to 125%.

Financial market participants are now interpreting the situation as less of a global trade war, and more of a tariff showdown between the US and China.

This “less bad” news was enough to allow the stock market to turn back up during the second half of April.

When all was said and done (or, perhaps more aptly put, after all that was said), here’s how things shook out in the financial markets for the full month of April:

Note: Foreign Stocks = MSCI EAFE Index; Tech Stocks = Russel 1000 Technology Index; Bonds = Bloomberg US Aggregate Bond Index; US Large Co = S&P 500 Index; US Small Co = Russell 2000 Index

Year-to-date through April 30, here are returns for the above asset classes:

  •  Foreign stocks, +12%
  • Tech stocks, -10.4%
  • Bonds, +3.2%
  • US Large Co, -5.1%
  • US Small Co, -11.6%

Positive momentum pushed the stock market up further during the first two days in May.

By the close of trading on Friday, May 2, the S&P 500 index of large company US stocks had rallied for nine straight trading sessions and had reclaimed all losses registered in April.

The quick recovery from April’s intense bout of crisis-like volatility indicates that investors seem believe the American economy isn’t about to slide into recession, and that it will take a much bigger shock to push stocks into a bear market.

-RK

Donna Cournoyer
In Reading Recommendations

Reading Room: Who Is Government?

Michael Lewis was 26 years old when he wrote about his experience as a bond salesman at Salomon Brothers. Liar’s Poker is considered one of the books that defined Wall Street during the “greed is good” era of the 1980s.

Since then, he’s authored more than 30 books on the topics of finance, economics, and sports. He has a unique ability to take complex topics and break them down into stories about relatable people.

His latest work is: Who Is Government?: The Untold Story of Public Service.

In a departure from his typical solo approach to writing, Lewis enlists six of his author friends to write a chapter for the book (Lewis himself writes two).

Each chapter is a story about a specific individual, working in a non-glamorous area of government, doing amazing things. Through these stories, the reader is able to develop a better understanding of how government works for the people, through people committed to the idea of public service.

In a recent podcast, Lewis said “all these people (profiled in the book) have found the secret to living a meaningful life. They could all be far wealthier working outside the government, but they choose to work inside the government because they have a sense of mission.”

-RK

Donna Cournoyer
In College Planning

Choosing the Right College Before the Decision Deadline

The following article was contributed by our colleague and college financial advisor Donna Cournoyer 

May 1, commonly known as National College Decision Day, marks the deadline for high school seniors across the U.S. to commit to the college they plan to attend in the fall. With multiple acceptance letters in hand, this decision can feel both exciting and overwhelming.

Here are some key considerations to help students and families make a confident choice.

1. Revisit Your Priorities
Start by reflecting on what matters most to you. Academic programs, campus culture, location, extracurricular opportunities, class sizes, and internship pipelines can all make a big impact on your college experience. While prestige and high rankings are nice, make sure the school aligns with your goals and values.

2. Compare Financial Aid Offers and Merit Scholarships Awarded
Cost is a major factor for many students. Lay out all the financial aid packages you’ve received, including scholarships, grants, loans, and work-study options. Calculate the net cost (not just the tuition sticker price) and consider long-term debt implications.

Merit scholarships (non-financial need funds) are especially important if you do not qualify for financial aid. If you are considering a school that does not offer merit scholarships, be sure to know the full price you will be responsible for.

Be sure to have a four-year financing plan in place, not just a way to “make it through paying for year one”.

3. Attend Accepted Student Events
Many colleges offer virtual or in-person events for admitted students during April. These are great opportunities to ask questions, meet future classmates, and get a real feel for the campus environment.
Have your questions ready and seek out those who can help to give you important information to help you make this decision.

4. Talk to Current Students and Alumni
Hearing honest perspectives from current students or recent graduates can offer insights you won’t find with college brochures and marketing materials. Those leading the tours are going to “sell” you on choosing their school, usually no matter the cost.

Be sure to ask about academic rigor, social life, career support, and anything else important to you.

5. Trust Your Gut
At the end of the day, this is your decision. You might not have all the answers, and that’s okay. Consider where you felt the most comfortable, excited, or inspired. Your instinct can be a powerful guide.

Final Tip: Don’t Miss the Deadline

Once you’ve made your choice, be sure to submit your enrollment deposit by May 1 to secure your spot. Also, notify the schools you’re not attending so they can offer spots to wait-listed students.

Choosing a college is a milestone—and while it’s a big decision, it’s just the beginning of an exciting new chapter. Take a deep breath, weigh your options, and take the next step with confidence. By this time, you have put in the hard work both in high school and in your college search.

Finally, celebrate your decision. This is a major milestone! Enjoy the remainder of senior year and rest up this summer (maybe work to earn a few extra dollars) so that you are ready for move-in day this fall.

Additional Pointers for Parents

Right now, you are not alone. Many families across the country are working together to help their high school seniors make one of the most important decisions of their academic journey: choosing which college to attend. As a parent, your guidance, support, and perspective can play a vital role.

Here’s how you can help your student make a thoughtful, confident choice:

  • Now is the time to remind your student about their priority list and to help them focus on where they will thrive. While attending a school of prestige has certain attractions, the reality is that most of the time, other schools on their list will offer everything your student needs to have a great career and make connections that will last a lifetime.
  • Hopefully you have already had a conversation about finances. However, now is a good time to review with your student their financial responsibilities, including costs, loans, etc. It’s also important to discuss what you are willing to finance as their parent. Be sure it is a realistic plan and makes sense for all of you. If it is not a smart decision financially, it may be wise to consider another choice.
  • Offer support, give guidance and perspective, but give your student space to use their own judgement. Your reassurance can go a long way to helping them feel confident and excited about the way forward.

Best of luck to students and parents in making the big decision!

Donna Cournoyer
In Economy

Trade Walls Go Up

In this article:

  • Review of recent government policy actions
  • Recap of financial market performance as of early April
  • Crisis case study
  • Ideas for investors facing financial market disruption

Policy Action Review

“Liberation Day” arrived on April 2, when President Trump announced his newest round of tariffs during a Rose Garden press conference.

The president also presciently warned “there may be short-term pain.” Indeed. US stockholders were collectively liberated from about $5 trillion in the most recent two trading days, according to Reuters news agency.

After stocks fell sharply on April 3 and 4, the onset of a new bear market (typically defined as a 20% market decline from the recent peak) which was hard to imagine just weeks ago, now looks much more likely.

This time around, government policies have precipitated financial market disruption and are expected to cause widespread economic dislocation.

A summary of the Trump Tariffs:

  • 10% baseline on all imports, effective April 5
  • Assess higher country-specific tariffs for the “worst-offending” trading partners, effective April 9
  • Combining the new tariffs with those that have already been announced moves the average effective tariff rate up to about 22%
  • Canada and Mexico were notably excluded from the most recent round of tariffs
  • Aluminum, steel, and autos are also exempt as they are already covered by targeted tariffs
  • Energy, minerals, copper, pharmaceuticals, semiconductors, and lumber were excluded, but are expected to be affected at some point by sector-specific tariffs

The new tariff regime is roughly equivalent to the high tariff levels of the early 1900s, a time when the US economy was far smaller and much less integrated with the global economy.

Tariffs likely will present a sizable shock to both prices and economic growth.

The estimated impacts to economic growth and inflation are:

Source: Apollo

These impacts, assuming the announced tariffs remain in place for some time, mean that economic growth in the US for 2025 is likely to be in the neighborhood of 1% (not a recession) and inflation will probably be in the neighborhood of 4%.

Following the announcements on Wednesday, professional forecasters began to raise the probability that the US economy will fall into recession.

For example, Goldman Sachs puts the risk of US recession at 35%, while JP Morgan now places the odds of a recession at 60%.
Despite recession odds climbing significantly, most Wall Street economists continue to support a base-case scenario of modest economic expansion in 2025.

However, because the tariffs were far steeper than expected, the reaction in the financial markets was pronounced and negative.

Financial Market Assessment

So, just how bad has damage been in the financial markets? For stocks, the short answer is: pretty bad.

The policy-driven Liberation Day was followed by investor-driven “Hibernation Days”: the broad-based S&P 500 index of large-company US stocks, for example, fell by more than 10%. US stocks are now within spitting distance of a bear market.

Bonds have provided a counterweight in balanced portfolios, with many bond funds registering price appreciation. The Bloomberg Aggregate US Bond Index (investment grade bonds) increased in value by about 0.5% during the past two days.

Below is a table of historical asset class returns, ranging from very short-term (last two days), to the long term (previous 10 years).

Source: Morningstar

How much worse could it get?

The answer depends largely upon the extent of the economic damage, which likely will be a function of the extent and duration of the new tariff regime.

Since 1950, there have been 56 pullbacks of 10% or more, according to a recent article in Barrons. Twelve months after those corrections, stocks were higher 49 times.

Of the seven they failed to rebound, six of them came during a recession. In the median recession, stocks have fallen by 25%.

The most recent “worst” recession / bear market combination occurred during the Global Financial Crisis of 2007 – 2009. The unemployment rate reached 10%, and the US stock market declined by approximately 56%.

The second worst recession / bear market combination in recent times occurred in 2000 – 2002, following the “dot-com” bubble. The unemployment rate reached 6%, and the US stock market declined by approximately 49%.

Crisis Case Study
The Trump Tariff War may turn out to be a seismic event. It may be the start of a reordering that will change economic and political relationships for decades. It might cause inflation to spike, companies to retrench, consumer and business confidence to crater, and workers to lose jobs.

Trump Tariffs may bring on an epic bear market in stocks, and stocks could stay in the gutter for an extended period. Or maybe they won’t.

In an optimistic scenario:

  • foreign countries decide to negotiate rather than retaliate
  • inflation rises incrementally rather than exponentially
  • US companies decide to reshore operations that are currently located offshore
  • foreign companies locate more of their operations in the US
  • more jobs are created for US workers (who are also consumers)
  • business and consumer spending goes up rather than down
  • the economy continues to expand rather than contract

To expect that all this happens immediately seems a bit pie-in-the-sky. But it also can’t be ruled out.

In a less optimistic scenario, but still positive scenario President Trump may decide on a different course of action (history shows that Trump can change his mind). A new, new tariff regime may be less onerous, and the economic growth and inflation impact may be less severe than feared.

It’s fair to say that the current tariff regime is unprecedented in the US – at least in terms of the last hundred or so years. The range of potential outcomes from the new trade regime is wide, where “crisis and crash” must also be considered.

In the two worst-case scenarios referenced in the previous section (dot-com bubble and Global Financial Crisis), the issues affecting the US economy were multi-layered and deep.

In the case of the dot.com bubble, the speculative frenzy for buying “lottery ticket” stocks of unprofitable companies associated with the internet reached a fever pitch and pushed stock prices in general far beyond rational levels.

Also, widespread corporate accounting fraud precipitated widespread business failures which exacerbated the stock market crash.

In the case of the Global Financial Crisis (GFC), the combination of speculative frenzy in the US housing market; overextended homeowners; loosened US financial institution regulation; wildly extended bank balance sheets around the world; fraudulent activity at US rating agencies; and failure-to-act government were all factors in the stock market crash.

In today’s situation, stock prices are generally regarded as being high relative to history, but not wildly overvalued, so the condition of speculative excess seems to be absent.

Also, the traditional US banking system appears to be stable and sound. The regulatory screws were turned tightly post GFC, which has helped to keep bank risk taking in check.

So, the Trump tariff situation strikes me to be more of a single-event flashpoint.

For a case study in what can happen during a crisis caused by a single-event flashpoint, consider the situation in 2020:

  • On February 4, 2020, the City of Boston reported the first case of the “novel coronavirus” in Massachusetts, which also happened to be the eighth case of the infection reported in the US
  • On March 10, Massachusetts Governor Charlie Baker declared a state of emergency
  • In late March 2020, the S&P 500 index of large-company US stocks plunged to its lowest point during the pandemic, declining by a third from its record high of a month earlier.
  • Covid had been in the public consciousness for several weeks, and the magnitude of the health crisis was just sinking in.
  • No one knew how deadly, or how long-running, the pandemic would be.
  • A recession was just starting, and the severe economic contraction would extend into the summer.
  • No one knew when we would have an effective vaccine (turns out, we got one by year end)
  • Investors were panicking.
  • Yet stocks began to turn around on March 24 (gaining almost 10% on that day alone).
  • By August 18, the stock market was back at a record high.
  • The first COVID-19 vaccine received approval in December 2020
  • For the full year of 2020, stocks posted a gain of 18%

The pandemic was a health catastrophe, and many folks unfortunately are still dealing with related illness and personal loss.

The period of a half-decade ago also serves as a reminder for why it’s so important to stick to your financial plan and your investment strategy.

Covid crushed consumer and business confidence and tore through the social and economic fabric of the US. Financial market deterioration was sharp and swift, registering a 34% stock market decline in a matter of weeks during February and March 2020.

But recovery was sharp and swift, too, with stocks reversing the decline by August 2020, and ultimately gaining 18% for the full year of 2020.

Market Disrupted. Now What?

What should investors do? Looking before leaping is always advisable. So is pausing before pressing the “sell” button.

Reducing risk by selling stocks may bring temporary relief to emotional stress and pain caused by a sudden drop in stock prices, but it has seldom proven an effective approach for building wealth over the long term.

Prudent action can take a few forms during financial disruption, including:

  • Tax loss harvesting:fo r individual or joint brokerage accounts subject to capital gains tax, a stock market downturn might cause prices of some individual stock or stock fund holdings to fall below cost. Selling holdings below cost creates a capital loss, which can be used to offset capital gains realized in other parts of the portfolio. Or, if no realized gains are available to offset, a realized loss can be used to offset taxable income, subject to an annual limit, and carries forward for use in future year.
  • Roth Conversions: a Roth conversion involves taking a distribution from a traditional IRA, paying income tax on that distribution, and immediately depositing or “converting” that distribution into a Roth IRA. If a conversion takes place during a low point in stock prices (instead of during a high point), stock fund shares will have a lower value, so more shares can be moved from Traditional IRA to Roth IRA for the same tax bill. When the markets recover, the subsequent share appreciation in the Roth IRA occurs tax free.
  • Rebalancing: If you believe that corrections are temporary, and that over the long-term stock prices will rise, then a stock market drop can be viewed as an opportunity. The idea of rebalancing is simple: investors choose a target asset mix (such as: 60% stocks and 40% bonds). When asset price changes pull actual portfolio weights away from target weights, investors sell the assets that have gone up in price and buy the assets that have gone down in price. This rebalancing brings the portfolio back into line with its target. When stock prices fall, rebalancing allows investors to buy long-term appreciating assets at a discount.

When investors are faced with economic crises (whether pandemic-induced or policy-inflicted) and financial market turmoil, advice such as “keep calm”, “try going for a walk”, and “don’t look at your account statements” probably falls flat.

However, sticking to your plan is not the same thing as sticking your head in the sand. It is important to be aware of what’s going on, to try to understand how the landscape might be different in the future, and to adjust your financial situation accordingly.

Taking prudent action may mean stress-testing your financial plan to account for a new economic environment and to give you confidence that things will be OK over the long term. Or it may mean reviewing your investments to see how changes in the financial markets might affect the prospects of future returns. It might even mean asking for an interpretation of a new technological development that is causing confusion or concern.

Susan, Donna, Alex and I are here to help with any of these issues, or other items that may affect your personal financial situation.

I’ll leave you with this closing thought: it will take much more than a draconian new set of trade policies to take down US consumers, US businesses, and the US financial markets. We may feel pain from self-inflicted wounds (in the words of JP Morgan analyst Bruce Kasman, “there will be blood”), but the damage is much more likely to be terminable (and manageable) rather than terminal.

Donna Cournoyer
In Market Updates

March 2025 Market Recap: Q1 Market Review: Mixed Picture

Given the developments that have occurred in early April – implementation of draconian trade policy and a sharp drop in stocks – the first quarter of 2025 already seems like ancient history.

The three main developments during the January – March 2025 period were:

Stocks reached new all-time highs in mid-February, but didn’t stay at those lofty levels for long as tariff concerns set in

  1. Foreign stock returns exceeded US stock returns by the widest margin in some time, helped by a weakening US dollar
  2. Bonds provided ballast for portfolios by delivering positive returns

Here’s a snapshot of quarterly stock and bond performance for the last four quarters:

Note: US Large Co = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

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