by David Robertson, CFA
May 2025
Both the S&P 500 and VBIAX balanced fund ETF rose gently early in the quarter and then dove sharply beginning in mid-February. Total return for the S&P 500 finished down 4.3% and the balanced fund finished down 1.8%. Travails continued into April with much higher volatility being the key feature.
While investors should expect a few bumps here and there, the new Trump administration bolted out of the gates with policies that have changed the political, economic, and financial landscape. We definitely are not in Kansas any more. How should investors interpret the changes?
Making the grade
Amidst the market and policy volatility of the first quarter (and through April as well), it's easy to get sucked into the riptides of daily news headlines. After the first 100 days of the Trump administration, though, grades are rolling in so we can start to make some assessments. For example, The Bulwark ($) reports:
May 2025
Both the S&P 500 and VBIAX balanced fund ETF rose gently early in the quarter and then dove sharply beginning in mid-February. Total return for the S&P 500 finished down 4.3% and the balanced fund finished down 1.8%. Travails continued into April with much higher volatility being the key feature.
While investors should expect a few bumps here and there, the new Trump administration bolted out of the gates with policies that have changed the political, economic, and financial landscape. We definitely are not in Kansas any more. How should investors interpret the changes?
Making the grade
Amidst the market and policy volatility of the first quarter (and through April as well), it's easy to get sucked into the riptides of daily news headlines. After the first 100 days of the Trump administration, though, grades are rolling in so we can start to make some assessments. For example, The Bulwark ($) reports:
CNN, in the field April 17–24, has Trump with a 41 percent job approval rating—down 7 percentage points over the last two months—and a 59 percent disapproval rating. Only 22 percent of respondents “strongly” approve of his performance while 45 percent “strongly” disapprove.
The numbers are pretty striking. And what’s also striking is that support for Trump’s performance on a wide range of issues has declined across the board. Obviously, he’s stronger on some issues than others—but on all of them, he’s trending down. This kind of broad disapproval is harder to reverse than if there were simply just one issue harming his presidency, on which he could presumably change course.
Bruce Mehlman highlights an interesting quirk in these data, however. In the survey data he reviews he finds “the Trump Administration often seems to have the right goals but consistently disappointing means for achieving them.” He concludes, “The Administration is doing what a majority thinks is right, but in a way that a majority thinks is wrong…”
He presents DOGE as an example:
He presents DOGE as an example:
A similarly differentiated opinion between goal and execution exists with immigration. The Bulwark ($) also reports a Reuters/Ipsos poll found “that 50 percent of respondents believed Kilmar Abrego Garcia, who was wrongly deported to El Salvador, should be returned to the United States while only 28 percent said he shouldn’t be.” In short, “People want immigration to be quote-unquote ‘handled’ but they want it to be done in a way that fits with their idea of the American justice system.”
In short, the verdict so far is that the Trump administration is properly identifying important political hot buttons, but it is not executing well on them.
This curiosity is worth exploring. Why does the differential between goal and implementation exist and how confident should investors and voters be that it resolves favorably?
One possible reason for the performance shortfall is the Trump administration does not have a good handle on what it takes to actually solve the problems it has targeted and/or has not properly considered the consequences. Clearly, policy moves have come fast and furious, but so too have the negative consequences.
Massive, and arguably reckless, cuts by DOGE have crippled fruitful programs while providing little verifiable benefit. Substantial, across-the-board increases in tariffs have shaken confidence in global supply chains and driven up expectations of inflation, but show little promise of resetting persistent trade imbalances.
While it is too early to pass definitive judgment on these initiatives, the signs are not good. Rapidly declining poll results indicate the Trump administration is not adequately serving voters. Rapidly declining economic results suggest its policies for boosting the economy are also failing.
Another possible reason for the performance shortfall is intent. It is possible the Trump administration is not guided primarily by the intent to achieve better outcomes for the American people. By this hypothesis, the Trump administration has its own agenda which is different than governing. Its policies are designed to pursue that agenda, but in a way that may only tangentially address political concerns.
This would explain DOGE cuts that eliminated programs that were clearly beneficial and often seemed more targeted at political retribution than at meaningful cost savings. It also explains the refusal of the administration to redress the admitted violation of due process in regard to Kilmar Abrego Garcia. If the Trump administration were truly compelled to serve the American people, it would be doing a lot of things differently.
It is true the Trump administration has made concessions and course corrected, most notably in regard to tariffs. As such, it may indicate some capacity to evolve and adapt to the political environment. But the “Liberation Day” tariff announcements surprised the market and threatened to cause a catastrophic dislocation. It’s easier to characterize the administration’s deferral of tariffs as a last-ditch effort to avoid disaster than as an operational norm, however.
Interestingly, these evaluations are remarkably similar to those generated by ChatGPT 4o when prompted to evaluate Trump administration policies through the framework of POSIWID (the Purpose Of a System Is What It Does). On economics, ChatGPT assesses: “The outcomes indicate that the administration's protectionist policies have led to economic instability, challenging the narrative of promoting economic growth.” In regard to civil liberties, it finds: “These actions suggest an underlying objective to suppress dissent and control narratives, undermining principles of free speech and press freedom.” The common theme is disruption, without improvement.
China Syndrome
While the Trump administration is making its influence felt through countless executive orders and domestic policies, the single issue that matters most is China. As Russell Napier makes clear in his latest Solid Ground ($) newsletter, the foremost global problem is the excessive debt burden of the world's largest economies. Further, the primary cause of that excessive debt can be traced back to financial and economic imbalances with China.
It's not just debt, per se, that is the problem, but rather the mechanics behind its continued and unsustainable growth, i.e., the fiscal deficit. The problem originates in China where workers do not get compensated adequately for their contribution to production. As a result, Chinese workers cannot afford all of the goods China produces and manufacturers have to export excesses abroad.
By virtue of its reserve currency status, the US ends up absorbing a disproportionate share of these Chinese manufacturing excesses. That leaves the country with the unfortunate choice of either suffering higher unemployment or enduring ever-higher levels of debt. For years, rising debt wasn’t a huge problem. Now it is.
One thing to understand about this situation is it has been going on for decades. China chose a model to grow fast at the expense of other economies, it massively ramped up that model, and now it is so big and causing so many problems for other economies that something has to change. The imbalances created by this process have not been modest cyclical ones, but rather major structural ones.
Another thing to understand is that China has a large, powerful, interconnected economy and a growing military capacity. As such, it has a great deal of ability to leverage those strengths in order to achieve its own objectives and can be expected to do so.
Both the US and China also have their own set of economic and geopolitical constraints. Vested interests in both countries grew powerful under an expanded global trade system and can be expected to resist any changes to that system, regardless of public policy.
Given these conditions, one thing that becomes obvious is there is no easy answer to resolve the imbalances between the two countries. Even if both governments wanted to, there would still be significant resistance. Any belief that these problems can be dispensed with quickly as the result of a “deal” indicates a major misunderstanding of the nature of the challenge.
As a result, the baseline expectation for relations between the US and China should revolve around a protracted struggle between two superpowers. This contest could evolve in a number of ways including an extended cold war or even a hot war, but is highly unlikely to resolve quickly or painlessly.
Progress report
With that characterization, how is the Trump administration performing on China, the single most important issue for the country?
Interestingly, David Autor, the MIT economist, arrives at an evaluation of Trump administration performance on China that is remarkably similar to Bruce Mehlman’s evaluation on domestic policy issues.
According to the Atlantic ($), Autor shares the view of the Trump administration that “Free trade with China has been a disaster for the American worker, and we need tariffs to reverse the damage.”
However, Autor also finds the execution on the issue to be wanting:
In short, the verdict so far is that the Trump administration is properly identifying important political hot buttons, but it is not executing well on them.
This curiosity is worth exploring. Why does the differential between goal and implementation exist and how confident should investors and voters be that it resolves favorably?
One possible reason for the performance shortfall is the Trump administration does not have a good handle on what it takes to actually solve the problems it has targeted and/or has not properly considered the consequences. Clearly, policy moves have come fast and furious, but so too have the negative consequences.
Massive, and arguably reckless, cuts by DOGE have crippled fruitful programs while providing little verifiable benefit. Substantial, across-the-board increases in tariffs have shaken confidence in global supply chains and driven up expectations of inflation, but show little promise of resetting persistent trade imbalances.
While it is too early to pass definitive judgment on these initiatives, the signs are not good. Rapidly declining poll results indicate the Trump administration is not adequately serving voters. Rapidly declining economic results suggest its policies for boosting the economy are also failing.
Another possible reason for the performance shortfall is intent. It is possible the Trump administration is not guided primarily by the intent to achieve better outcomes for the American people. By this hypothesis, the Trump administration has its own agenda which is different than governing. Its policies are designed to pursue that agenda, but in a way that may only tangentially address political concerns.
This would explain DOGE cuts that eliminated programs that were clearly beneficial and often seemed more targeted at political retribution than at meaningful cost savings. It also explains the refusal of the administration to redress the admitted violation of due process in regard to Kilmar Abrego Garcia. If the Trump administration were truly compelled to serve the American people, it would be doing a lot of things differently.
It is true the Trump administration has made concessions and course corrected, most notably in regard to tariffs. As such, it may indicate some capacity to evolve and adapt to the political environment. But the “Liberation Day” tariff announcements surprised the market and threatened to cause a catastrophic dislocation. It’s easier to characterize the administration’s deferral of tariffs as a last-ditch effort to avoid disaster than as an operational norm, however.
Interestingly, these evaluations are remarkably similar to those generated by ChatGPT 4o when prompted to evaluate Trump administration policies through the framework of POSIWID (the Purpose Of a System Is What It Does). On economics, ChatGPT assesses: “The outcomes indicate that the administration's protectionist policies have led to economic instability, challenging the narrative of promoting economic growth.” In regard to civil liberties, it finds: “These actions suggest an underlying objective to suppress dissent and control narratives, undermining principles of free speech and press freedom.” The common theme is disruption, without improvement.
China Syndrome
While the Trump administration is making its influence felt through countless executive orders and domestic policies, the single issue that matters most is China. As Russell Napier makes clear in his latest Solid Ground ($) newsletter, the foremost global problem is the excessive debt burden of the world's largest economies. Further, the primary cause of that excessive debt can be traced back to financial and economic imbalances with China.
It's not just debt, per se, that is the problem, but rather the mechanics behind its continued and unsustainable growth, i.e., the fiscal deficit. The problem originates in China where workers do not get compensated adequately for their contribution to production. As a result, Chinese workers cannot afford all of the goods China produces and manufacturers have to export excesses abroad.
By virtue of its reserve currency status, the US ends up absorbing a disproportionate share of these Chinese manufacturing excesses. That leaves the country with the unfortunate choice of either suffering higher unemployment or enduring ever-higher levels of debt. For years, rising debt wasn’t a huge problem. Now it is.
One thing to understand about this situation is it has been going on for decades. China chose a model to grow fast at the expense of other economies, it massively ramped up that model, and now it is so big and causing so many problems for other economies that something has to change. The imbalances created by this process have not been modest cyclical ones, but rather major structural ones.
Another thing to understand is that China has a large, powerful, interconnected economy and a growing military capacity. As such, it has a great deal of ability to leverage those strengths in order to achieve its own objectives and can be expected to do so.
Both the US and China also have their own set of economic and geopolitical constraints. Vested interests in both countries grew powerful under an expanded global trade system and can be expected to resist any changes to that system, regardless of public policy.
Given these conditions, one thing that becomes obvious is there is no easy answer to resolve the imbalances between the two countries. Even if both governments wanted to, there would still be significant resistance. Any belief that these problems can be dispensed with quickly as the result of a “deal” indicates a major misunderstanding of the nature of the challenge.
As a result, the baseline expectation for relations between the US and China should revolve around a protracted struggle between two superpowers. This contest could evolve in a number of ways including an extended cold war or even a hot war, but is highly unlikely to resolve quickly or painlessly.
Progress report
With that characterization, how is the Trump administration performing on China, the single most important issue for the country?
Interestingly, David Autor, the MIT economist, arrives at an evaluation of Trump administration performance on China that is remarkably similar to Bruce Mehlman’s evaluation on domestic policy issues.
According to the Atlantic ($), Autor shares the view of the Trump administration that “Free trade with China has been a disaster for the American worker, and we need tariffs to reverse the damage.”
However, Autor also finds the execution on the issue to be wanting:
he also believes that Trump—who has imposed sweeping 145 percent tariffs on nearly all Chinese imports, and who seems to announce or walk back some new trade policy at least once a week—is challenging that consensus in the most counterproductive way possible.
In words that clearly echo those of Mehlman, Autor concludes, “I think the Trump folks are asking the right question. But they’ve come up with just about the worst answer.”
Something’s gotta give
What should investors make of all this?
For starters, in an environment in which the financial and economic landscape is enormously influenced by politics and public policy, and in which assessments of politics are frequently biased, it’s good to be aware of the biases that exist on both sides. Bruce Mehlman provides some good advice:
Something’s gotta give
What should investors make of all this?
For starters, in an environment in which the financial and economic landscape is enormously influenced by politics and public policy, and in which assessments of politics are frequently biased, it’s good to be aware of the biases that exist on both sides. Bruce Mehlman provides some good advice:
Analysts need to resist personal bias in their assessments. Trump detractors may mistakenly think that the President shares their conviction that he’s failing (he doesn’t) and give up on policies they don’t like (he won’t). Supporters may mistake objective market signals for partisan criticism, missing critical signals amidst the noise.
That said, while it is still early in the administration, it’s been long enough to identify some important patterns. Across multiple dimensions, the Trump administration is not making things better. Further, in many cases it is making things worse. It doesn’t help much to investigate the causes. It’s enough to know that falling poll numbers and weakening economic results say existing policies are not working.
This reality co-exists awkwardly with two others. One is that time is running out. The fiscal deficit is unsustainably high and budget discussions to date come nowhere near resolving them. Another is that markets are still working on an extremely sunny set of assumptions. Foremost among those is the assumption that policymakers will save investors from experiencing significant pain.
This setup establishes an extremely unattractive risk/reward tradeoff for investors in US financial assets. About the best that can be expected is the administration reverses harmful policies, business resumes as if “Liberation Day” never happened, China inexplicably acquiesces completely, and all is forgiven and forgotten. In this case stocks remain about the same because all of this is already priced in. Based on the evidence, this is a low probability scenario.
A middle path involves business conditions that continue to weaken. Persistently adverse conditions are attenuated by intermittent policy interventions. This avoids a market crash, but ultimately manifests in a lower steady-state stream of cash flows. Through a relatively long adjustment process, stock valuations reset to new, lower levels.
The worst case starts down the middle path, but inflects downward when something breaks, when unintended consequences manifest, when geopolitical brinkmanship escalates, or when some other surprise crops up for which known policy responses are ineffective. Recent weakness in the US dollar and jumps in Treasury bond yields indicate some investors are beginning to seriously consider such a possibility.
Conclusion
For long-term investors, the implications are straightforward. This is an unusually hostile environment for risk assets. If you are not extremely comfortable with your level of risk exposure, you need to act NOW. If you are comfortable, and have a fair amount of liquid assets, you can start war-gaming the types and amounts of risk you might want to add at much lower prices in the not-too-distant future.
This reality co-exists awkwardly with two others. One is that time is running out. The fiscal deficit is unsustainably high and budget discussions to date come nowhere near resolving them. Another is that markets are still working on an extremely sunny set of assumptions. Foremost among those is the assumption that policymakers will save investors from experiencing significant pain.
This setup establishes an extremely unattractive risk/reward tradeoff for investors in US financial assets. About the best that can be expected is the administration reverses harmful policies, business resumes as if “Liberation Day” never happened, China inexplicably acquiesces completely, and all is forgiven and forgotten. In this case stocks remain about the same because all of this is already priced in. Based on the evidence, this is a low probability scenario.
A middle path involves business conditions that continue to weaken. Persistently adverse conditions are attenuated by intermittent policy interventions. This avoids a market crash, but ultimately manifests in a lower steady-state stream of cash flows. Through a relatively long adjustment process, stock valuations reset to new, lower levels.
The worst case starts down the middle path, but inflects downward when something breaks, when unintended consequences manifest, when geopolitical brinkmanship escalates, or when some other surprise crops up for which known policy responses are ineffective. Recent weakness in the US dollar and jumps in Treasury bond yields indicate some investors are beginning to seriously consider such a possibility.
Conclusion
For long-term investors, the implications are straightforward. This is an unusually hostile environment for risk assets. If you are not extremely comfortable with your level of risk exposure, you need to act NOW. If you are comfortable, and have a fair amount of liquid assets, you can start war-gaming the types and amounts of risk you might want to add at much lower prices in the not-too-distant future.
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