3 Things You Need to Know This Week | Breakevenitis, China Industrial Data, Tax Bill (May 19, 2025)

Transcript

Mackenzie Winner:

Hello, and welcome to 3 Things You Need to Know this Week— our regular series designed to help you sift through the noise across financial media and understand what really matters for markets. And now, here are three things you need to know this week.

First up, 'breakevenitis'.

Last week, the S&P 500 turned positive again for the year—at least in price returns. For some investors, this might feel frustrating, particularly for those whose portfolios are still down year-to-date. Alternatively, investors with portfolios nearing breakeven territory—or regaining their previous all-time highs—may consider playing it safe and shifting into a more "conservative" strategy, worried another big drop in stock prices could happen. It's common for investors to be tempted to sell when the market or their portfolio reaches its pre-downturn level. We call this temptation "breakevenitis" and it's rooted in human psychology— where we tend to feel the pain of a loss far more than the joy from an equally-sized gain.

Now, trying to avoid future losses can feel worth it, even if it means potentially missing market gains. And we know that following large downturns—such as the big correction we saw this year—are historically followed by big returns. Volatility can drive some investors to seek safety and get out of the market, waiting for clarity to arrive before jumping back in. However, we often remind investors—stocks don't wait for clarity or an "all-clear" signal. As they have in recent weeks,  stocks typically start rallying amid widespread negative sentiment—long before most investors can imagine a brighter future. And waiting for clarity could mean missing out on some of the rapid returns that often follow large market declines.

Next, China's April Industrial Production.

This morning, China released its industrial production data for April, with today's reading offering a first glimpse at how President Trump's tariffs may be impacting the Chinese economy. Chinese industrial production surged in the first quarter, as US businesses rushed to stockpile goods ahead of anticipated tariffs. Though data showed production remained strong in April, many worry contraction is imminent due to tariff uncertainty. That said, it's important to note that April's production may have been impacted by businesses pulling forward production in a rush to beat tariff implementation.

Additionally, there can be a lag of weeks or even months between when orders are placed and when goods are produced. In April, new orders decelerated, signaling potential softening in industrial production from here, though, new order levels remain well above those seen in 2020 or 2022. As we've said before, we believe tariffs are always negative economically, and the tariffs announced by President Trump on April 2nd were unprecedented in both size and scope. Stocks fell sharply in early April due to tariff fears, but markets have since rebounded as news of trade deals and tariff pauses have been announced, including the May 11th announcement of a 90-day pause on higher tariffs between the US and China. This raises the question: Did markets overreact to tariffs opening the door for stocks to rally when things turn out to be better than originally feared? We think so, but as always, we encourage investors to remain clear eyed about the potential for negative surprise.

Finally, US Tax Bill Negotiations.

Republicans in the House of Representatives appear to be closing in on a consensus for a new tax bill, aiming to pass it through the reconciliation process by Memorial Day. Details are still in flux, but the plan seeks to extend part, or all, of the 2017 Tax Cuts and Jobs Act, along with some of President Trump's campaign promises, like removing taxes on tips and Social Security. But sticking points like cuts to Medicaid, amongst others, are making it tough to find agreement within the party's razor-thin majority. If Congress fails to act by either extending the Tax Cuts and Jobs Act or introducing new tax changes, then the US will revert back to the pre-2017 status quo, adjusted for inflation. That scenario could mean individuals in some tax brackets would likely see an increase to their marginal tax rate if the policy sunsets.

For now, we think spending too much time trying to weigh possibilities of what might happen is probably premature. While the president can suggest legislation and sign or veto whatever Congress passes, the power of the purse ultimately lies with Congress. The specifics of any future tax policy will depend on what the House and Senate negotiate and agree upon. However it pans out, we suspect markets will take it in stride, slowly pricing in all potential outcomes along the way. And it wouldn't be too surprising to see some short-term volatility if politicians decide to turn up fiscal cliff warnings. But to us, any sweeping or controversial tax changes seem unlikely given the narrow margins of control in both chambers of Congress. Importantly for investors, tax rate changes haven't historically impacted stock market returns in a predictable way. And in general, markets have typically risen regardless of tax changes.

And that's it for this episode of 3 Things You Need to Know This Week. For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit fisherinvestments.com. Thanks for tuning in and don't forget to like and subscribe!