Covering the bond market’s role in capital markets, jobs, earnings reports, tariffs and more.
In the 1990s, President Bill Clinton looked to enact the economic stimulus package he had touted on the campaign trail. But Clinton was forced to abandon much of that plan and fix the budget rather than risk skyrocketing interest rates that would tank the economy. What caused this dramatic shift? The bond market.
At the time, Clinton’s political advisor James Carville famously said: “I used to think that if there was reincarnation, I wanted to come back as the president or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Famous economist Ed Yardeni echoed this sentiment by describing these outraged investors as “bond market vigilantes” for their role in preserving law and order in the capital markets when nobody else could.
Which is why it was interesting to hear newly minted U.S. Treasury Secretary Scott Bessent say that he and President Trump are focused on the benchmark 10-year Treasury Bond yield, and that the president is not calling on the Federal Reserve to lower short-term interest rates. Bessent said the all-important 10-year bond yield (a rate used as a proxy for mortgage rates and also seen as a sign of investor sentiment about the economy) should be able to come down naturally as a result of Trump’s policies. He noted how lower energy prices will help contain price pressures, while spending cuts implemented by Elon Musk’s “Department of Government Efficiency” (DOGE) will improve the fiscal outlook.
Bessent also said the White House wants Trump’s tax cut package from 2017 to be extended permanently before their expiration this year, rather than a temporary extension. It would be quite a feat to have the 10-year Treasury Bond yield fall even as tax cuts are extended, but trading into the week’s end showed the markets were pleased by these goals and the idea that Trump would not be interfering with Fed President Jay Powell and our nation’s central bank.
Likewise, financial markets took some comfort from the on-again, off-again tariff drama. Tariffs set to take effect on imports from Canada and Mexico were halted for one month amid discussions of trade and security. Mexican President Claudia Sheinbaum said she will reinforce the border with the U.S., with a reciprocal pledge from the U.S. to work to prevent the trafficking of high-powered weapons into Mexico. Canada agreed to spend $1.3 billion to reinforce the border and stop the flow of fentanyl.
But a 10% tariff on Chinese goods coming into the U.S. went into effect this week, as planned. Chinese officials opted to impose counter-tariffs in response instead of coming to the negotiation table. These retaliatory tariffs include a 15% tax on imports of $5 billion in U.S. energy and a 10% fee on American oil and agricultural equipment.
Despite the back and forth, risks to the market and threat to international relationships, the Trump administration continues to tout the importance of tariffs as a carrot-and-stick tool to ensure international cooperation at the border, as well as securing fair trade deals. American consumers are trying to cope with the whiplash, with retailers urging shoppers to buy now and to brace for the worst in price hikes and shortages.
Economic data this week had the major highlight (or lowlight) of another jobs report, reflecting January gains of 143,000. This was lower than the expected 169,000 new payrolls, but unemployment dropped to 4.0% from 4.1%.
We also saw a slew of earnings reports from the likes of Amazon, Alphabet, Palantir, Microstrategy, Ford, Eli Lilly, Qualcomm and Arm Holdings. Most of these companies hit their mark, but in this period of lofty valuations, they witnessed sideways trading. Remarkably, fourth-quarter S&P 500 earnings growth (including companies that have reported and estimates for those yet to report) was 12%, up from 9.5% entering earnings season. However, earnings estimates for 2025 show some downgrades that have brought what was once a 14% growth projection down to 12.9% and potentially lower. Tariffs, trade wars and the economic uncertainty that they bring have no doubt contributed to that shift.
Finally, it is worth noting that Trump’s proposal to transform Gaza into the “Riviera of the Middle East” (a place where international communities could coexist by relocating Palestinians somewhere else) drew gasps from many corners but witnessed almost zero market reaction as investors cast a skeptical eye over such a plan. Financial markets are fully focused on earnings for now, which is how it should be, and so are we on your behalf. After two years of double-digit increases in the stock market and rising earnings growth expectations, we would still posit that 2025 could deliver a continuation of the bull market. We suspect it might be a bull market with a lowercase “b,” characterized by a lot more volatility given the fast-moving landscape of policy changes and fuller stock valuations.
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