INSIGHTS

June 2025

A Change in Regime

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Data: U.S. Department of the Treasury Daily Treasury Par Yield Curve Rates 
1/2/2025: First trading day of year.

2/3/2025: Trump signs an executive order on February 1 to impose tariffs on imports from Mexico, Canada and China — 10 percent on all imports from China and 25 percent on imports from Mexico and Canada starting Feb. 4. Trump invoked this power by declaring a national emergency — ostensibly over undocumented immigration and drug trafficking. On February 3, Trump agrees to a 30-day pause on his tariff threats against Mexico and Canada, as both trading partners take steps to appease Trump’s concerns about border security and drug trafficking. On February 4, Trump’s new 10 percent tariffs on all Chinese imports to the U.S. still go into effect. China retaliates th e same day by announcing a flurry of countermeasures, including sweeping new duties on a variety of American goods and an anti-monopoly investigation into Google. The Treasury yield curve is little changed from the start of the year; stocks are modestly higher.

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Source: S&P Global

3/4/2025: Trump’s 25 percent tariffs on imports from Canada and Mexico go into effect, though he limits the levy to 10 percent on Canadian energy. He also doubles the tariff on all Chinese imports to 20 percent. All three countries promise retaliatory measures. Canadian Prime Minister Justin Trudeau announces tariffs on more than $100 billion of American goods over the course of 21 days. And Mexican President Claudia Sheinbaum says her country would respond with its own retaliatory tariffs on U.S. goods without specifying the targeted products immediately, signaling hopes to de-escalate. 

China, meanwhile, imposes tariffs of up to 15 percent on a wide array of key U.S. farm exports, set to take effect March 10. It also expands the number of U.S. companies subject to export controls and other restrictions by about two dozen. On March 5, Trump grants a one-month exemption on his new tariffs impacting goods from Mexico and Canada for U.S. automakers. The pause arrives after the president spoke with leaders of the “Big 3” automakers — Ford, General Motors and Stellantis. On March 6, in a wider extension, Trump postpones 25 percent tariffs on many imports from Mexico and some imports from Canada for a month. But he still plans to impose “reciprocal” tariffs starting on April 2. On March 10, China’s retaliatory 15 percent tariffs on key American farm products — including chicken, pork, soybeans and beef — take effect. Goods already in transit are set to be exempt through April 12, per China’s Commerce Ministry previous announcement. On March 12, Trump’s new tariffs on all steel and aluminum imports go into effect. Both metals are now taxed at 25 percent across the board — with Trump’s order to remove steel exemptions and raise aluminum’s levy from his previously-imposed 2018 import taxes. Bond yield decline as stocks sell off.

4/3/2025: The day after “Liberation Day” on which Trump announces his long-promised “reciprocal” tariffs — declaring a 10 percent baseline tax on imports from all countries, as well as higher rates for dozens of nations that run trade surpluses with the U.S. Among those steeper levies, Trump says the U.S. will now charge a 34 percent tax on imports from China, a 20 percent tax on imports from the European Union, 25 percent on South Korea, 24 percent on Japan and 32 percent on Taiwan. The new tariffs come on top of previously-imposed levies, including the 20 percent tax Trump announced on all Chinese imports earlier this year. Meanwhile, for goods from Canada and Mexico, the White House says USMCA-compliant imports can continue to enter the U.S. duty free. Once the two countries have satisfied Trump’s demands on immigration and drug trafficking, the White House adds, the tariff on the rest of their imports may drop from 25 percent to 12 percent. On April 3, Trump’s previously-announced auto tariffs begin. Prime Minister Mark Carney says that Canada will match the 25 percent levies with a tariff on vehicles imported from the U.S. On April 4, China announces plans to impose a 34 percent tariff on imports of all U.S. products beginning April 10, matching Trump’s new “reciprocal” tariff on Chinese goods, as part of a flurry of retaliatory measures. The Commerce Ministry in Beijing says it will also impose more export controls on rare earths, which are materials used in high-tech products like computer chips and electric vehicle batteries. And the government adds 27 firms to lists of companies subject to trade sanctions or export controls. On April 5 (Saturday), Trump’s 10% minimum tariff on nearly all countries and territories takes effect. The US Treasury 10-year yield drops to 4.05% and the yield curve steepens significantly as stocks trade at their lows for the year.

4/9/2025: Trump’s higher “reciprocal” rates go into effect, hiking taxes on imports from dozens of countries just after midnight. But hours later, his administration says it will suspend most of these higher rates for 90 days, while maintaining the recently-imposed 10% levy on nearly all global imports. China is the exception. After following through on a threat to raise levies against China to a total of 104%, Trump says he will now raise those import taxes to 125% “effective immediately” — escalating tit-for-tat duties that have piled up between the two countries. China upped its retaliation prior to this announcement — vowing to tax American goods at 84% starting April 10. Canada’s counter tariffs on auto imports also take effect. The country implements a 25% levy on auto imports from the U.S. that do not comply with the 2020 USMCA pact. Meanwhile, EU member states vote to approve their own retaliatory levies on 20.9 billion euros ($23 billion) of U.S. goods in response to Trump’s previously-imposed steel and aluminum tariffs. The EU’s executive commission doesn’t immediately specify which imports it will tax, but notes its counter tariffs will come in stages — with some set to arrive on April 15, and others May 15 and Dec. 1. The 90-day pause for all but China sparks a sharp rally in stocks and a further steepening in the yield curve in the longer-dated maturities.

5/21/2025: On May 8, The United States and Britain announce a trade deal, potentially lowering the financial burden from tariffs while creating greater access abroad for American goods. Britain says the deal will cut tariffs on U.K. cars from 27.5% to 10%, with a quota of 100,000 U.K. vehicles that can be imported to the U.S. at a 10% tariff. It also eliminates tariffs on steel and aluminum. Under the agreement, the U.K. is also to buy more American beef and ethanol, and streamline its customs process for goods from the U.S. But Trump’s baseline 10% tariffs against British goods are to stay in place. Separately, the EU publishes a list of U.S. imports that it would target with retaliatory duties if no solution is found to end U.S. President Donald Trump’s tariff war. The European Commission also says it would begin legal action at the World Trade Organization over the “reciprocal tariffs” that Trump imposed on countries around the world a month ago. On May 12, the United States and China agree to roll back most of the tariffs each nation had imposed on the other and declared a 90-day truce in their trade war. The Trump administration says it will reduce the 145% duties it had imposed on imports from China to 30%, while China says it would cut its 125% tariffs on U.S. goods to 10%. 1

On May 22, Republicans in the House pass “One, Big, Beautiful Bill” (“BBB”, HR1) that Trump wants to see on his desk for signature by July 4. The rally in stocks stalls and the long end of the yield curve reaches its highest yields since 2023.

Then vs Now

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Data: U.S. Department of the Treasury Daily Treasury Par Yield Curve Rates 

In March 1997, inflation stood at 1.94% and was inching up ever so slightly. The glorious 1990s economy was roughly six years into its 10-year-long expansion, and the Fed wanted to ensure that prices stayed moored to its 2% target. 2   The Fed taps the brakes lightly with just one rate hike of 0.25% on March 25 to fix the Fed Funds rate at 5.50%. That rate stood until the Fall of 1998.

The 1998 rate cut cycle was unusual because the sources of economic tension driving the FOMC’s moves came mostly from abroad.

An interrelated series of events prompted the three rate cuts in the fall of 1998. An Asian currency crisis started in Thailand in 1997 and then swept through the rest of Asia and Latin America. This helped spark a currency crisis in Russia in late 1998, and these problems drove a giant U.S. hedge fund called Long-Term Capital Management to the brink of bankruptcy.

In a terse statement—by modern standards—accompanying the September 1998 rate cut, the Fed simply announced that “action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically.” 3   The Fed cut rates by 0.25% in each of three successive meetings, beginning September 29, to 4.75%.

Similarly, in September 2024, the Fed also began cutting rates, moving 0.50% in the first meeting, then two 0.25% cuts in the two subsequent meetings to arrive at a range of 4.25%-4.50%.

While the shape of the curve and general level of rates are quite similar, there are some material differences between now and then:
  • Inflation in 1998 was 1.6%, following 1997’s 1.7%, and GDP growth 4.3%. Inflation in 2025 stands at 2.4% and GDP is estimated to have declined -0.3% in the first quarter due to the ramp up of imports for inventories in front of tariffs. 4
  • The Federal government ran budget surpluses beginning in 1998 through 2001. The current budget deficit is as large as it has ever been since World War II except for COVID 2020. 5
Between 1995 and its peak in March 2000, the Nasdaq rose 400% as a frenzy of speculation pushed up the value of internet stocks and tech companies.

The Fed watched the bubble inflate and stepped in with rate increases starting in June 1999. With the unemployment rate hovering around 4% and inflation inching toward the Fed’s 2% target, former Fed Chair Alan Greenspan wanted to stamp out any chance that inflation expectations could get entrenched—hence the 50 bps raise to cap this tightening cycle. 6   By the end of this hiking cycle, Fed funds stood at 6.50% in May 2000. The bubble of “irrational exuberance” as described by Chair Greenspan burst and the Fed cut rates down to 3.5%, acting in each meeting starting January 2001. Then 9/11 happened. The Fed continued to cut rates every meeting for the remainder of the year, finishing at 1.75%.

This extraordinary amount of activity by the Federal Reserve had not been seen since the Volker years of choking inflation out of the economy. Pushing rates down that low set the stage for the next bubble to come: housing. The collapse in the housing market in 2007 triggered the Great Financial Crisis, which begat Quantitative Easing.

The point we are making is that an activist Fed can and does distort normal interest rates that would otherwise be set by broad economic conditions. While we approach the first period of normalization in 25 years, it bears keeping in mind that Chair Powell’s term ends next year. At this juncture, it appears to us that the next Fed chair and those governors appointed by the President are likely to be far more activist than the current regime.

Rebalancing

On April 3 and 4, we seized the opportunity offered by the drawdown in the stock markets to reallocate all accounts to their model allocations. What this meant for most accounts is that we sold off some of the Debt and Liquid Alternatives to buy stocks at prices roughly 10% lower than our last rebalance. We apply this discipline systematically when there is a significant correction in stocks from a drawdown. We use more discretion when stocks have appreciated.

On May 20, we again rebalanced our ”B” Series of models. Here’s what we did:
  • Full Liquidation – EMXC, MAEGX, HEFA
  • New positions – SPEM, BAI, VTIP, BNDX
  • With client assets in these models concentrated in higher allocations to Equities, about 30% was rebalanced. That’s significant for this series.
What does it mean?
  • S&P 500® exposure reduced by about 40%
  • Thematic rotation factors added and largest 50 within the S&P 500® overweight added
  • New position BAI – an active ETF with a concentrated 40 holdings in companies with AI exposure across the full value chain. 
  • Full sale of EMXC (Emerging Markets other than China). Buying SPEM, similar exposure which does not exclude China.
  • MAEGX – exit an unconstrained, go anywhere, do anything fund: seeking specific exposures instead 
  • HEFA – currency hedged exposure to developed Europe and Japan: weak dollar triggered.
  • Doubling exposure to EFV – the value version of the EAFE (developed Europe and Japan) index.
Reallocation seeks to concentrate remaining U.S. exposure further up the cap stack (mega size companies with large moats to protect them) while broadening foreign exposure to benefit from a weaker dollar. The direct China exposure on the downside in its heaviest weighting is 0.43% of the entire portfolio if it goes to $0, a move suggested by BlackRock that for now we live with but monitor. Other models have only indirect exposure to China.

Fixed Income:
  • Adding slightly to SPTL across all “B’ models. This position offsets the add to Tech concentration in Equities. So far this year, when those stocks have been punished, SPTL has softened the blow. That is its job in this model construction which is focused on growth.
  • New position in VTIP – short term TIPS, duration of 2.5 years, YTM of 3.6%, only in the 30% Equity/70% Debt model (because we do not offer lower equity allocation in the series). Another BlackRock suggestion that we are watching, interested to see how it fits. Plays to reacceleration of growth in second half with sticky inflation.
  • New position in BNDX – again only in the 30% Equity/70% Debt model: a global bond fund outside the U.S. that should benefit from dollar weakness. It has slightly more interest rate risk, offset by a bit more yield, and similar credit risk to the U.S. version of the same index.
  • No change to Liquid Alternatives exposure. The add to inflation protection securities without an additional add to gold is worth noting.
The significant moves are an expansion beyond the U.S. in stocks, while refocusing further on AI and the mega-large companies coupled with a subtle offset to persistence of inflation.

Changes to the AWM Tactical Models (“S” series)

We are comfortable with the allocations to Debt for income in this model series. While reasonably comfortable with most of the Equity allocations, we have updated as follows, on June 10:
  • The economies of Europe by GDP are ranked in this order: Germany, France, UK, Italy and Russia.
  • Germany has committed to a 5% of GDP defense spend. Within the ETF (EWG) we have chosen to overweight exposure to Germany, the top 10 holdings are:

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Source: Morningstar
  • All of these companies should benefit from the stimulus generated by increased defense spending, in our view. This spend likely stretches out over the next decade and beyond.
  • France cannot get out of its own socialist way – there is no move afoot to change anything except stuffing the bed with more feathers. C’est la vie.
  • UK has similar issues to France socially, but a greater will to fund defense. 2.3% of GDP in 2024 moving toward 2.7% by 2027. But, contrast that order of magnitude to the German commitment, where Germany is a significantly larger economy.
  • Italy and Russia are presently uninvestable (corruption on multiple levels).
  • Japan remains monetarily dysfunctional, forced to raise rates while the balance of the developed world cuts.
  • India surpassed the UK in size of economy in 2021, and China in size of population in 2024. The India middle class grows and entrepreneurs are celebrated. Antiquated bureaucratic impediments remain a large challenge to all comers as well as restrictions upon foreign investors. Treasury Secretary Bessent has said that India is particularly situated as an easier negotiation because their tariffs and restrictions are transparent. All are equal in the face of the bureaucracy, including homegrown. India’s growth rate ex-COVID persists above 8%. The overweight to India (ETF: FLIN) is justified and maintained. 
While EAFE exposure is still underweighted otherwise by around 50% to the benchmark ACWI (MSCI All Capitalization World Index), Germany will be overweighted to 30% from 2.37% of the ACWI. Country overweights are thus India, Germany, and mostly the United States.

We have replaced the Liquid Alternative allocations to match those found proportionally in our “B” series of models, with one exception. We substitute GIOIX for BIMBX. BIMBX is a less sophisticated (and likely less-resourced) combination of both GIOIX and BDMIX, in our view. GIOIX gives the model better diversification both as to strategy as well as manager concentrations.

Liquid Alternatives Correlation Matrix

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Source: FactSet
 Finally, we have continued conviction about the persistence of USA exceptionalism over the longer term. It is worth noting, as Fed President, Chicago, and former chair of Council of Economic Advisers, Alan Goolsbee, recently did, that imports make up only 11% of US GDP. Prices rising on that small a share of GDP seem more annoying than game-changing.

The retooled “S” models seek to better the benchmark ACWI in the Equity allocations by currently using a broader version of the S&P 500® Index, weighting the same 505 companies equally rather than by value of their stock outstanding, to which are added factor and sector tilts. We overweight the United States, Germany, and India. We employ factor rotation within the dominant U.S. allocation: momentum, size, volatility, quality, and value or growth. Finally, believing the United States economy to still be in decent shape with deregulation and stimulus from the tax bill yet to come, we continue to overweight the Consumer Discretionary, Banks, and Energy (the last represented by mid-stream pipelines) sectors.

On the debt side of the ledger, we continue to hold duration, a measurement of sensitivity to interest rates, at about half of that of the benchmark (AGG) as we have since early 2022 when the Federal Reserve began raising short term interest rates. The yield of this part of the portfolio is currently better than 5% and provides a cushion against volatility in equity values. 

We are retooling our selection of Liquid Alternatives in the “S” series. The existing sleeve has delivered returns in between those provided by the equity and debt allocations with little correlation to either. While that was the desired portfolio effect, we believe the revamped selection is better positioned to deliver better performance still.

Investment Mandate

As we have observed in the past, not to pick sides in a given set of politics is politic when investing. You pay us to invest based on the probable outcomes of what is observable. At present, the Republicans appear to be on course to finish the construction of what Secretary Bessent has described as the fiscal “three-legged stool” of tariffs, tax reduction, and deregulation. The trimming of the size of the Federal government, on a relative basis, has to date been a sideshow.

Tax reduction and deregulation are, de facto, stimulative. From what is currently unfolding in the legislative process, we remain skeptical that enough fat can be trimmed to ease rather than bloat the current account deficit. Remember, pork is fatty naturally – there’s plenty of pork in the “BBB”, HR1, to grease it through both houses of Congress.

Further, why would the current administration and legislature want to promote austerity and sacrifice when there’s a Congressional election in November 2026? The fan’s blades won’t really get soiled until after 2030, when both Social Security and Medicare are forecast (non-partisan) to be unable to deliver the benefits delivered today. Cynical, true…but we see no other more probable outcome at present.

All of this fiscal reordering will likely be stimulative and inflationary.

Good for stocks (equities). Not so good for longer term bonds (debt); but shorter-term debt will likely pay well for longer. Liquid Alternatives probably prosper.

Our reconfigured “S” series of models seeks to express these broad probabilities with specific exposures. 

The “N” models are more neutral to their equity benchmark, possess the same bond exposure as “S”, and have no Liquid Alternative exposure. This series of models is crafted to be more neutral by intention to its two benchmarks while providing sufficient alpha through “smart beta” to cover fees.

The “B” models are designed for long-term growth. The Debt and Liquid Alternatives allocations in the “B” models are calibrated to offset the volatility inherent to a growth bias.

Your advisor uses judgment, experience, and other tools to match your needs, goals, and ability to stomach risk to a particular model. You’re where you are for a reason – most likely, a number of reasons. Your advisor will be happy to explain.

© 2025 The Forge Companies. All rights reserved.

  1. Non-italicized commentary courtesy of PBS News and The Associated Press, "A timeline of Trump’s tariff actions so far”, by Wyatte Grantham-Philips, 5/26/2025. (https://www.pbs.org/newshour/economy/a-timeline-of-trumps-tariff-actions-so-far)
  2. “Federal Funds Rate History 1990 to 2025”, Taylor Tepper and Farran Fowler, https://www.forbes.com/advisor/investing/fed-funds-rate-history/
  3. Op.Cit. Tepper and Fowler.
  4. Bureau of Labor Statistics, https://www.bls.gov/opub/mlr/1999/04/art3full.pdf. Bureau of Economic Analysis, https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
  5. U.S. Bureau of Economic Analysis via FRED®, annualized https://fred.stlouisfed.org/series/M318501Q027NBEA
  6. Op.Cit. Tepper and Fowler.
The model portfolio performance returns shown are hypothetical, for illustration only, and do not represent the performance of a specific actual client account. Performance does not reflect actual trading, nor does it include variable transaction expenses which would further reduce returns. Each AWM model series portfolio invests in securities which have weighted allocations that drive the performance results. The underlying constituent performance results reflect actual historical performance. Returns on the investment in the model portfolio assumes reinvestment of dividends and capital gains. The models performance reflects rebalance those allocations in response to market conditions, as well as at the initial point in time a change was made to an individual allocation within the model.

The S&P 500 Index, and sub-indices reflective of the S&P 500’s various sector components, are unmanaged indices commonly used as benchmarks to measure broad U.S. stock market performance and characteristics and sector-specific performance and characteristics respectively. The Magnificent 7 is an unmanaged sub-set of stocks in the S&P 500 Index used to illustrate the impact of certain sector and stock constituencies on the S&P 500 Index as a whole. The reinvestment of dividends, interest, and other distributions is assumed. These are free-float weighted/capitalization-weighted indices. An additional reference is made to the S&P 500 Equal Weight Index (EWI) which is the equal-weight version of the widely used S&P 500. The equal-weight index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The MSCI ACWI Index is an indicator of global markets, capturing approximately 85% of the global investable equity opportunity set, including stocks predominantly across the large and mid market cap spectrum and across a number of countries, both developed and emerging. Bond data provided by ICE BofA sourced from an independent provider of corporate bond indices. Indexes used as benchmarks cannot be directly invested in by you. Index performance is also for illustration only, to provide a relative comparison for the model portfolio. Index performance does not reflect any management fees, transaction costs or expenses.

Past performance does not guarantee future results.

The views expressed represent our assessment of our strategies and the market environment as of the dates represented in the publication and should not be considered investment advice or a recommendation to purchase or sell any specific security or invest in a specific strategy nor used as the sole basis for an investment decision. Views and holdings are subject to change.

There are no guarantees that a strategy will achieve its investment objective. All investments involve risks that you will lose value including the amount of your initial investment. Investments that offer the potential for higher rates of return generally involve greater risk of loss. Clients should review carefully reports or statements produced by us, such as for performance and cash flows, and compare the official custodial records to any such that we provide. Information we provide could vary from custodial statements based on accounting procedures, reporting dates, or valuation methodologies of certain securities.

References to specific securities/ETFs are not intended as recommendations of said securities and carry no implications about past or future performance. Holdings and weights are subject to change. Information about all recommendations made within the past year is available upon request.

Reinvestment transactions that involve selling existing investments may involve transaction and taxation costs associated with the sale of those assets as well as transaction costs associated with the purchase of new investments.

International investing: There are special risks associated with international investing, such as political changes and currency fluctuations. These risks are heightened in emerging markets.

Small/Mid-Capitalization investing: Investments in companies with small or mid-market capitalization ("small/mid-caps") may be subject to special risks given their characteristic narrow markets, limited financial resources, and less liquid stocks, all of which may cause price volatility.

Growth Stock Risk: Growth stock investments, whether directly or through ETFs and mutual funds, may be more sensitive to market movements because their prices tend to reflect investors’ future expectations for earnings growth rather than just current profits.

Sector Risk: To the extent a strategy series has substantial holdings within a particular sector, the risks associated with that sector increase.

Liquidity / Market Risk: The strategy series may not be able to purchase or dispose of investments at favorable times or prices or may have to sell investments at a loss. Additionally, market prices of investments held by strategy series may fall rapidly or unpredictably due to a variety of factors, including changing economic, political, or market conditions, or other factors including war, natural disasters, or public health issues, or in response to events that affect particular industries or companies.

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Inflation Protected Bond investing: Interest rate increases can cause the price of a debt security to decrease. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

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