Monthly Outlook: June 2025
The stock markets, for the last two or three months, have been as volatile as I’ve ever experienced, and I’ve been investing for four decades (gulp). The U.S. stock index, S&P500, plummeted 20% and then rebounded 22%. That still leaves it 3% short of the recent high, but that’s the math of compounding. Similarly, the NASDAQ 100 (Big Tech) dropped 24%, then rallied 28%, and is 3% off its high. The same “dump & bump” pattern held true for international stocks with the INTL EAFE index falling 15% and then recovering 22% for a net 5% gain. The point is that all major stock markets moved about 40%+ in just two months if you add the down with the up. Investors just don’t see that kind of movement very often and it’s unsettling, to say the least.
We surely don’t need to explain the cause of the volatility to our readers, but we’ll state it for the record. The Trump tariffs announced in early April were huge, unprecedented, and somewhat unexpected (in their size and breadth). The market reaction is proof that investors do not like surprises and they don’t like restrictions on free trade. When Trump backtracked on his tariff sledgehammer policies, and then later when the courts ruled that he doesn’t have the authority to individually impose such tariffs, the markets rallied back to pre-tariff levels with a sigh of relief. If only we could just take our stock charts and fold the last two months together to hide them, they would look normal. But we can’t, of course, and we all experienced the roller coaster of the last two months. Fortunately, we followed our systematic trading rules to dampen the drawdowns in April and then participate in the growth in May. Portfolios are slightly positive, YTD, as a result. As I like to say, it’s better to make dollars than sense.
We’re Back to Pre-Tariff Levels – So, Is it “All Clear?”
Now that the stocks are back to the pre-tariff levels (close enough), it might be tempting to exhale with a sigh of relief and think that we’re back to normal. Do we have a “coast is clear” signal? As the markets recovered in mid to late April, the uptrends were enough to remove our sell signals and need for protection. And for us, the absence of a sell signal is a buy signal, so we’re back to “all in” for stocks. That said, there are plenty of other concerns that we’re watching beyond tariff policies. As we move into summer, we hope to continue making money in stocks, but are watching price trends closely and are willing to protect again if necessary.
Just like pre-tariffs, stock valuations remain at peak levels. The S&P500 price is $5,912 and trailing earnings are $218. That calculates to a P/E of 27.1x. It’s only been that high four times in the past 100 years: 1929, 2001, 2008, and 2020. You’ll likely know that stocks didn’t do well in the immediate years following those peaks. Valuations only make sense if you believe the lofty earnings forecasts by Wall St. analysts. Collectively, they guess that 2025 earnings will rise to $238 and 2026 will rise further to $275. That’s 26% growth in just under two years and seems unlikely given the many headwinds we see. Further, analyst forecasts are notoriously optimistic and almost always wrong.
Another concern worth watching is the U.S. federal budget working its way through Congress. So far, the House has passed a budget that plans for a $3T deficit, adding to our existing $34T accumulated debt. The Senate will tweak it, of course, but if something like it gets through, the bond market is likely to shiver in disbelief and that could be problematic for all markets.
It’s understandable, then, that Consumer Confidence Index has fallen to 98.0, which is below the threshold that typically signals a recession ahead. Retails sales are slowing, house prices are softening, and unemployment has been slowly rising, as well.
Understand Your Risk Tolerance Now
Although there are ample concerns (frankly, there always are to some extent), there are also reasons to be optimistic and bullish on markets. As erratic as policies are from D.C., you just never know. But NOW is the time to understand your risk tolerance. How much of a drawdown (peak to trough loss) can you really tolerate? You may not know that a typical 70/30 stock/bond portfolio mix has had many drawdowns of 20% to 40% over the years. If you’re following a buy & hold strategy, you will experience drawdowns like this, and maybe soon. You either need to change your mix, or adopt a different strategy that adds a layer of risk management to reduce drawdowns. Our iFolios strategy does that.