Key Points:
Economic and Market Conditions
Federal Policy and Tariff-Inflation
The Impact of Tariffs on Consumers
Deficit-Driven Bond Yield Pressure
The impact of Japan's bond market on the US market
Market expectations and investment environment
The dominant position of retail investors in the stock market
Investment advice
Economic and market status
text="">The U.S. economy usually maintains growth. Historical data shows that since World War II, the U.S. economy has been in an expansion period for about 90% of the time, with an average annual growth rate of about 2.5%-3%. However, about 10% of the years will enter a recession due to external shocks (such as financial crises, epidemics or policy changes), resulting in reduced economic activity and lower consumption. Currently, the market is concerned about whether the Trump administration's newly announced tariff policy (such as the 50% tariff on the European Union, suspended until July 9, 2025) will lead to economic contraction. Analysis shows that the probability of a recession is about 20%, lower than the previous expectation of 50%, but tariffs may push up prices and trigger inflationary pressure. The impact of inflation on low-income groups is particularly significant. According to data from the National Retail Association, 50% of U.S. retail sales in 2024 will be contributed by the top 10% of the population, indicating that wealth concentration has reached a record high and low-income groups are more sensitive to price increases.
Federal policies and tariff-induced inflation
The market expects the Fed to cut interest rates 2-3 times in 2025, but as tariffs may lead to rising inflation, the Fed may maintain the current federal funds rate of 4.25%. In the first and second quarters of 2022, US GDP shrank by 1.6% and 0.6% respectively (later revised to slightly positive), but as the inflation rate climbed from 3% to 9%, the Fed still raised interest rates by 75 basis points per time, indicating that it prioritizes controlling inflation. Currently, federal funds futures show that the probability of a rate hike in June 2025 is less than 10%, 25% in July, and below 50% in September. The probability of a rate cut on October 29 is only about 55%. Tariffs may cause a one-time price shock. Data shows that starting from May 1, 2025, the prices of products originating from China will rise significantly, with the overall consumer price index (CPI) rising by 0.7% in 25 days, from 1.3% to 2.1%. If companies continue to pass on costs or use tariffs as a reason to raise prices, it may lead to "unanchored inflation", that is, price increases across the board, forcing the Federal Reserve to maintain high interest rates.
The impact of tariffs on consumers
Tariffs are paid by importers, and some of the costs are passed on to domestic companies and consumers through the supply chain. Corporate profit margins are currently at historical highs (the average net profit margin of S&P 500 companies in 2024 is about 12%), and they are able to absorb some of the tariff costs, but tend to pass the costs on to consumers. Data from Truflation and PriceStats show that starting May 1, 2025, the price of imported goods will rise significantly, with the CPI rising by 0.7% in less than a month. Tariff policies are designed to incentivize domestic production and encourage consumers to buy domestic products that are not affected by tariffs, which may change consumer behavior. For example, Trump's policy of exempting tariffs on US-made products may push consumers to turn to domestic goods and reduce price pressure. However, consumers may still face price increases in the short term, especially low-income groups, as their consumer goods basket has a higher proportion of imported goods (about 30%-40%).
Deficit-driven bond yield pressure
The US federal government's fiscal year 2024 budget is about $7 trillion, tax revenue is about $5 trillion, and the deficit is $2 trillion, accounting for about 7% of GDP. It is expected that the deficit may increase to $2.5 trillion in the next few years, accounting for about 8%-9% of GDP. High deficits increase the demand for funds in the bond market, pushing up yields. In May 2025, the 10-year Treasury yield has exceeded 5%, reflecting rising inflation expectations (the market expects CPI to be about 3% in 2025) and risk premiums (term premiums). The bond market needs to absorb a large amount of government debt, and it is expected that financing needs will reach $2.5 trillion per year in 2026-2027. In order to attract funds, yields may further climb to 5.5%-6%, higher than the historical average (the average 10-year Treasury yield from 1960 to 2020 was about 6%).
Impact of Japanese Bond Market on U.S. Market
Volatility in the Japanese bond market (JGB) has a significant potential impact on the U.S. market, as Japan is the largest foreign holder of U.S. Treasuries, holding approximately $1.13 trillion (data at the end of 2023). In May 2025, the yields of Japan's ultra-long-term government bonds (20-year, 30-year, and 40-year) hit record highs of 2.555%, 3.14%, and 3.6%, respectively, due to weak demand for the 20-year bond auction (the bid multiple was the lowest since 2012), reflecting investors' concerns about Japan's fiscal sustainability (Japan's debt/GDP ratio reached 260%, far exceeding the U.S. 120%). The Bank of Japan (BOJ) gradually withdrew from its bond-buying program (reduced to 3 trillion yen per month from 2024), exacerbating the decline in market liquidity and causing yields to soar.
Japanese investors (especially life insurance companies and pension funds, which manage more than $2.6 trillion in assets) began to reduce their investment in US Treasuries due to rising domestic yields and increased hedging costs caused by yen fluctuations (yen volatility rose to 10% in the first quarter of 2025), and sold a net 902.7 billion yen (about $6.1 billion) of foreign bonds in March 2025. If Japanese investors continue to sell US Treasuries and buy domestic high-yield JGBs instead, it may exacerbate the liquidity pressure of the $28.6 trillion US Treasury market and push up US Treasury yields (the 30-year US Treasury yield reached 4.83% in May 2025).
In addition, the "yen carry trade" (borrowing low-interest yen to invest in high-yield U.S. bonds) spawned by Japan's long-term low interest rate environment is huge in scale, estimated to involve trillions of dollars. The rise in JGB yields has reduced the attractiveness of carry trades, triggering "carry trade liquidation", resulting in capital flowing back to Japan and yen appreciation (USD/JPY fell from 160 to 157.75 in May 2025). This may reduce liquidity in the U.S. stock market, as quantitative funds often borrow yen to invest in U.S. stocks. The decline of about 5% in U.S. stock trading volume in May 2025 is related to this. If Japan further reduces its holdings of U.S. bonds, coupled with the need to refinance the U.S. $8 trillion in debt, it may force the Federal Reserve to intervene (such as restarting quantitative easing), increase money supply, push up inflation expectations, and further raise U.S. bond yields, forming a vicious cycle.
Market Expectations and Investment Environment
The zero interest rate and quantitative easing policies from 2010 to 2022 (the Fed's balance sheet increased from 1 trillion to 9 trillion U.S. dollars) have created an abnormally low interest rate environment, and the current 5% Treasury bond yield is close to the historical norm (the "History of Interest Rates" shows that the average interest rate in the past 5,000 years was about 4%-6%). The market needs to adjust its expectations for low interest rates and accept the "456 market": the annual return rate of cash (money market funds, treasury bonds) is about 4%, investment-grade bonds (including treasury bonds, corporate bonds, mortgage-backed securities) is about 5%, and the stock market (S&P 500) is about 6%. Total stock market returns in 2024 are close to zero (as of the end of May), far lower than 25% in 2023, reflecting high valuations (S&P 500 P/E ratio is about 22 times) and policy uncertainty. Investors need to accept lower returns and higher volatility, and active management strategies may outperform passive investing.
Retail investors dominate the stock market
Retail investors have significantly increased their influence due to low-cost ETFs (expense ratios as low as 0.03%-0.1%), zero-commission trading, and the popularity of social media information. In 2024, retail investors accounted for about 20%-25% of US stock trading volume, up from 10% in 2010. According to data from JPMorgan Chase, after the U.S. stock market fell 1.5% on a certain trading day in 2025, retail accounts invested $4 billion in 3 hours, pushing the market up. Retail investors are mostly young people (under 40 years old) and tend to trade in the short term, such as leveraged ETFs and zero-day expiration options (0DTE), accounting for about 30% of the options market. Social media (such as X platform) forms a group effect, amplifying the "bottom-fishing" behavior. However, history shows that retail-dominated periods (such as the 2000 technology bubble) are often accompanied by excessive speculation and market correction risks.
Investment Advice
Investors should adjust their expectations, accept a return rate of 4%-6%, and allocate assets according to their risk tolerance:
Cash
Money market funds or Treasury bills offer about 4% risk-free returns and are suitable for conservative investors.
Bonds
Investment-grade bonds (a $30 trillion market) offer returns of about 5%, with a return rate of 1.5% in 2024 and 1% in 2023. They have lower volatility than the stock market and are suitable for conservative investors.
Stock Market
The S&P 500 is expected to return 6% per year, but may be accompanied by 20% volatility (such as a rebound after a decline in 2024). Actively managed ETFs (such as ARK funds) or thematic investments (AI, energy) may bring excess returns, but diversification is needed to reduce risks.
Risk Management
Bear market recovery takes a long time (13 years for the 2000 technology bubble and 18 years for 1966). Investors need to consider their life cycle and goals. Investors over 70 should increase their cash and bond allocations, and those under 35 can diversify their risks through long-term fixed investments.
Coping with Japanese bond market risks
Given that JGB volatility may push up U.S. Treasury yields, it is recommended to reduce long-term U.S. Treasury exposure and increase short-term Treasury bonds or Treasury Inflation-Protected Securities (TIPS) allocations to hedge against inflation and rising yield risks.
It is recommended to participate in bond and alternative asset investments through professionally managed ETFs (such as BlackRock and Pimco's fixed income ETFs), as retail investors are less competitive in the fixed income market. The cyclical nature of the market requires investors to avoid a single strategy and focus on diversified allocation.
Davin
Kikyo
Catherine
Hui Xin
Joy