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MARCH 2025 MARKET INSIGHTS

By: ANTHONY MINOPOLI, PRESIDENT & CHIEF INVESTMENT OFFICER

After emerging from 2024, all eyes were on President Trump and the changes he would seek to make in his second, though disjointed, term. It is not an understatement to say that he hit the ground running. Of primary focus was securing the border and getting his Department of Government Efficiency, under Elon Musk and Vivek Ramaswamy, up and running. Cuts have been announced, lawsuits have ensued, and political pundits have any manner of opinions on what legal standing DOGE may have. I will leave this argument for others. There is, in my mind, one irrefutable argument that must be tackled. We have been running structural deficits for too long and we are capitalizing our operating deficit year by year to where we have over $36 trillion in debt.

I recognize that some of the national debt lives on balance sheets of the Treasury and Federal Reserve, so net debt is actually lower. That said, both parties have contributed to this spending. I will always make the case that the final two rounds of Covid stimulus were gratuitous and contributed to the deficit. Making the Trump tax cuts permanent without lowering government spending will also contribute to increasing the deficit. I recently read that if we reverted to 2019 spending, current tax receipts would put us close to a balanced budget. If politicians truly do not want Social Security and Medicare to be touched, they need to find consensus and get spending under control.

One other item exacerbating the outsized U.S. national debt is that a staggering $9.2 trillion of the debt is set to mature in 2025. This accounts for 25.4% of the country’s total debt, and given higher interest rates, there could be implications for financial markets, interest rates, and economic stability. When interest rates started to meaningfully decline during the Obama era, the Treasury continued to finance the national debt using Treasury bills and short-dated Treasury notes. When rates were near zero, this kept the cost of overall debt service quite low; That is no longer the case. The higher the percentage of tax receipts used for debt service, the less money available for discretionary and nondiscretionary government spending. This needs to become a priority and I hope that our elected officials begin to seriously focus on tackling the debt and deficit rather than kicking the can down the road.

As we review the markets from last month, the Bloomberg 1000 index was up, returning -1.7% during February[1]. Small cap stocks as represented by the Bloomberg 2000 returned -5.8% for the month[1]. In looking at market styles, the Bloomberg 1000 Growth Index returned -3.1% for the month and the Bloomberg 1000 Value returned 1.8%[1]. In February, large cap and value were the winning combination for domestic stocks. The Bloomberg World ex-U.S. returned 1.3% for the month, and international equity enjoyed outperformance over the broad U.S. equity index during February[1].

The bond market, as represented by the Bloomberg Aggregate Bond Index, returned 2.2% during February[1]. The Bloomberg 1-3 Year Government/Credit Index -represents the short-duration segment of the bond market- returned 0.70% during February[1]. From a yield perspective, we came into 2025 with the 10-year Treasury yielding 4.57% and we ended the month of February at 4.21%[1]. The return of broader fixed income market indices was mainly driven by declining interest rates. The 2-year Treasury note started January at 4.24% and ended the month of February at 3.99%[1].

The geopolitical situation remains as strained as ever. The recent and unfortunate exchange in the Oval Office between President Trump, Vice President Vance, and Ukrainian President Zelensky exposed to the world a gap between the thinking in the U.S, and in Ukraine. I read that Vice President Vance reacted the way he did because he felt President Zelensky sounded entitled to U.S. involvement and support. I am sure President Zelensky felt blindsided. Today in an article on Bloomberg by Daryna Krasnolutska, reporting indicated that Zelensky said Ukraine is ready to negotiate with Russia to end the war. This came on the heels of the U.S. pausing military aid to Ukraine. I feel this whole situation could have been handled better and ultimately the Russians need to get out of Ukraine and we need a lasting peace deal.

Ukraine unfortunately, is not the only spot of global unrest. Israel and Hamas are still working toward a peace agreement. We continue to watch Iran and their nuclear ambitions along with North Korea’s incessant saber rattling. Finally, China continues to threaten Taiwan through military maneuvers and “mistaken” cutting of undersea data lines. The world is in a fragile spot, and we need western nations to take the lead in restoring peace and continuing to spread the word on the benefits of free people and free trade.

What is there to worry about? Beyond the geopolitical issues, we are focused on the continued relationship between inflation, the job market, and Fed activity. The recent tariff announcements have hit the stock market, and we have witnessed bonds declining below 4.2%. The Fed may get their lower interest rates without having to do much because if the increasing economic concern translates into slowing economic activity, we may see a modest to moderate economic slowdown that could send bond rates lower. Tariffs can be relaxed as quickly as they are enacted so these next few weeks and months will be critical in helping us decipher the path forward.

Until next month.

[1] Source: Bloomberg

A portrait of Anthony Minopoli wearing a dark suit, white shirt, and red tie.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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