Kindness of Strangers | Steve Henderly, CFA
Printer Friendly PDF: June 2025 Commentary
The phrase “kindness of strangers” originates from Tennessee Williams’ Pulitzer Price-winning play, A Streetcar Named Desire, which was first performed in 1947. Character Blanche DuBois utters the phrase as she’s taken away to a mental institution following the loss of her home and reputation, revealing her vulnerability and reliance on others for emotional support and her detachment from reality. Is the US government and our Treasury similarly detached from reality when it comes to how it spends, overly reliant on the kindness of strangers? What if that kindness “dries up” and foreign investors and/or governments shun US debt and trade?
The focus on US government debt and deficit spending (as well as on debate around “fair trade”) continues to be a cloud over the market outlook in 2025. To be clear and despite some concerning, volatile movements
around bond yields, global stocks did NOT sell-off in May. In fact, anyone who followed the old market saying of “sell in May and go away” missed out, as the S&P500 added 6.2%, extending its recovery from the April 8 lows following Liberation Day. This pulled the S&P500 back into positive territory for 2025 (+1.1%) and within 4% of its all-time high set on February 19. It is interesting that thru May, the Mag 7 remain down -3.8% YTD compared to +3.8% for the remaining 493 companies in the S&P500. Will the Mag 7 reboot or continue to lag over the balance of the year? Perhaps most surprising: international stocks continued their attractive climb, as a group collectively up +15% YTD (!).
As noted in several of our recent monthly updates – isn’t it amazing how price (market performance) shapes sentiment? The performance of global stock markets in May provides encouragement and a more optimistic outlook than just a month and a half ago. But May was not without new unnerving twists. Moody’s downgraded its assessment of the United States’ “creditworthiness” by a notch from AAA to AA1 on persistent concerns about deficit spending and further provoked by the Trump administration’s “Big, Beautiful Bill” working through Congress. The downgrade coincided with a rise in government bond yields toward recent high levels – a condition which could signal waning appetite or “kindness from strangers”.
The 10-Year treasury yield is a good barometer of that appetite – or kindness. Over the last two years, yields above 4.5% indicate soft demand for US debt. Yields rising above 4.5% could spark austerity discussions in Congress as lawmakers confront elevated post-Covid spending alongside proposed extensions – and new additions – to tax cuts. These include eliminating taxes on tips, overtime, and Social Security, potentially adding trillions to the national debt. Japan is facing parallel issues; the level of government debt is not just a US problem. Higher yields make the task of funding government spending and refinancing existing debts more expensive and at odds with stocks continuing to ascend from here. Uncertainty remains elevated due to several conflicting themes.
“Hard data” continues to appear resilient: employment is steady, inflation is down (CPI now @ 2.3%), and 1Q corporate earnings were solid despite heightened anxiety among consumers and businesses. Public companies reported earnings growth of +14% and sales growth at +5% for the 1Q reporting season. US recessions don’t typically happen without falling profits. But recent data points cover the time period before tariffs truly escalated. The hard data is inconsistent with an economy that reportedly contracted in 1Q based on negative GDP due to companies importing inventory ahead of tariffs. The reality: what does any of the 1Q data offer us considering all the noise baked into it? With “on-again, off-again” tariff implementation, will 2Q data (likely to show strong growth due to fewer imports) be any more reliable?
Let’s Make a Deal? Compared to the level of anxiety following Liberation Day, tariff uncertainty feels decidedly lower but is far from eliminated. With only 30 days remaining in the 90-day pause on most tariffs (ending ~July 1st), actual signed deals are still murky or outright elusive. Aside from a few nominal advancements with smaller trading partners, talks in recent days appear moving in a sour direction (EU and China). The recent ruling by the US Trade court blocking most of Trump’s tariffs, quickly reinstated following an appeal by the White House, only adds to the uncertainty. Foreign officials seem less likely to negotiate or settle while the legality is determined. Whatever comes of tariffs, the implications for inflation are complicated! Removing tariffs could boost trade and spark growth, which theoretically could re-ignite inflation, effectively offsetting the relief to consumers sought via removing tariffs. Confused? Tariffs also test the desire of strangers to continue being kind.
With so many complex uncertainties at work, the most likely path for the market in the short term appears range-bound. Guarded sentiment of both consumers and businesses is yet to show up in the hard data. The true
impact of the tariffs and the resulting disruption remains difficult to measure – economic growth continues, and financial markets remain functional. This may embolden both the Trump administration and foreign leaders to “stick to their guns”. A continuation of the two-steps forward, one-step back pattern; escalate to de-escalate. Unfortunately, this likely means an extended stalemate and no quick resolution.
The Fed is poised to hold rates steady through the summer months waiting on hard data to support further rate cuts. As long as the fed is paused, it means short-term rates remain on par with longer-maturity debt like 10-year treasuries. This entices investors to purchase money funds or CDs instead of extending into longer duration bonds. With that said, both the administration and the Fed remain data-driven and reflexive. A good example being the pause on tariffs in response to market pressure and sagging approval ratings in early April. Data-driven policy raises the odds that pullbacks stay contained and we can avoid systemic shock, reducing the odds of a worst-case economic scenario (deep recession). We anticipate the Fed will ultimately cut rates later this year by 0.25% ~ 0.50%.
Governments – not just the US – remain reliant upon the “kindness of strangers”. But keep your seat belt fastened! With valuations back at the levels they entered 2025, a fed on pause coupled with uncertain fiscal and trade policy, it’s difficult to justify meaningfully higher prices. The market could experience larger than normal swings on seemingly small data points. Additionally, with such a strong positive move since early-April, it’s not uncommon to see the market stall 2-3 months off the most recent low. We’re entering a summer of known unknowns.
In short, Nvest does not consider itself “gun slingers, market timers, interest rate anticipators, or speculative traders”. Instead, we firmly believe that purchasing quality assets trading at reasonable prices will provide long-term success. We encourage continued faith in the “kindness of strangers” despite moments where that kindness appears jeopardized… we’re all in this together.
Common Questions:
- With international significantly outperforming domestic in 2025, how much do we own?
After what feels like forever, it’s nice to see international investments getting their day in the sun. Valuations remain more attractive than domestic and approximately 20% of stock exposure in client portfolios is foreign with an emphasis on quality dividend payers. We believe the tailwinds boosting performance in 2025 possess room to run.
- What are you doing with bonds? How are we positioned?
Nvest steadfastly maintains the perspective that clients own bonds for capital preservation and diversification. The current environment remains challenging for long-duration bonds given structural debt levels around the globe. Long-duration bonds can also introduce stock-like volatility on a portfolio when interest rates shift by even small amounts. For that reason, we emphasize shorter duration fixed income in client portfolios.
- Do we own any Bitcoin/Crypto?
We are not keen on chasing the flavor of the day. Seeing a particular asset class making new highs on a regular basis is emotionally difficult; it can feel like you are missing out! The volatility of the cryptocurrency asset class does not align with our long-term, fundamentals driven approach. To us, bitcoin/cryptocurrency still sits squarely in the speculative/trade category. When the parade is going down the street, be careful.