This Week in Review | Breakevenitis, US-China Negotiations, ECB Policy Meeting (June 6, 2025)

Transcript

Tim Schluter:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they may mean for markets, and most importantly, the potential impact for investors. Now let's review what happened this week.

First, how investors should think about markets passing break even.

This week, global stocks officially broke even from the large correction that began in mid-February. US stocks, as represented by the S&P 500 index are also back near record highs. When portfolios recovered to pre-downturn levels, a common investor instinct is to consider selling their stocks or shifting to a more conservative strategy. We call this impulse "breakevenitis." But history shows that selling out of stocks around the break even point is typically an expensive temptation.

Historically, US stock markets, for example, have recovered from downturns and eventually gone on to surpass the break even point and reach new highs. Patient investors who stayed invested eventually saw higher portfolio values than before the downturn. These recoveries can take time, of course, but for those investors who are looking to achieve growth in support of their long term financial goals, staying the course had huge benefits. For example, after falling nearly 57% during the global financial crisis, the S&P 500 fully recovered by 2012 and has since more than quadrupled. Now, market recoveries aren't usually a smooth ride, and negative volatility can arise at any time, including as markets near full recovery. It's also not unusual for stocks to wobble after the break even point, before eventually climbing higher. For investors who need growth from their portfolios, selling around break even can mean huge opportunity cost, and fighting this temptation and staying disciplined can really pay off, especially long term.

Next, US-China trade negotiations.

Higher tariffs between the US and China remain paused while negotiations grind on, but there seems to be subtle progress this week. Yesterday, President Trump and President XI Jinping held a 90 minute call that seemingly indicates that the US and China will meet soon to resolve the ongoing trade war. Still, many fear what will happen if the two are unable to reach an agreement. The current 90-day agreement, which ends in August, lowered the baseline tariff to 30% for US imports from China, while China set a 10% tariff on US exports. However, neither country took higher tariffs completely off the table. We think tariffs are poor economic policy. They make trade more difficult and tend to impact the country, imposing tariffs more than those subject to the tariffs. For countries targeted by tariffs, their effects are generally milder and can even spur positive developments.

For example, the tariffs announced by the US this year haven't stopped the rest of the world from trading freely. Instead, they appear to be encouraging free trade elsewhere this year, as countries worldwide have been actively negotiating new trade deals. Now, we don't expect these potential trade agreements to spark an immediate surge in world commerce, but they can certainly benefit the global economy and markets in the future. We think continued US-China trade uncertainty likely illustrates how trade fundamentals are more favorable outside the US, likely contributing to non-US stocks' outperformance so far in 2025. As for the US, while uncertainty remains, early data suggests that businesses have the means and motives to adapt even if the recent US-China trade agreement falters.

Finally, an ECB policy meeting.

Yesterday, the European Central Bank, or ECB, cut their key interest rate by 25 basis points. In doing so, they warned that US tariffs and retaliatory measures could drive near-term inflation higher in Europe. However, preliminary May eurozone inflation figures showed a recent deceleration to 1.9% year-over-year, below the ECB's target inflation rate. Looking ahead, we believe eurozone economic conditions likely surpass downbeat expectations, supporting European stock leadership this year. The ECB's rate cuts this year have contributed to a steepened yield curve in Europe. We think this is an underappreciated positive fundamental for European banks and stocks. A positive sloping yield curve where long term rates are higher than short term ones, is a traditionally positive backdrop for economic growth, as it encourages lending by boosting banks profitability.

Compared to Europe, the US yield curve remains relatively flat, providing less incentive for loan growth. This year, European stocks have performed better than US counterparts, with the MSCI Europe Index recently reaching new highs. While a steepening yield curve alone doesn't dictate market direction, we believe it's underappreciated. Impact could quietly continue driving European market leadership this year.

That's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks again, for joining us and don't forget to hit "like" and "subscribe!"