Commentary: Financial alarm bells

7 hours ago 23

The day after the election last November, the stock market enjoyed a really strong day, while the bond market did not. That was not at all surprising. The election brought the likelihood of lower taxes and less regulation, both of which make equities more attractive. It also brought fears of higher inflation, which tend to drive interest rates up and make bonds less desirable. Things have changed a lot since then with all of the uncertainty but therein lies a critical lesson.

Historically, it has been quite common — and quite natural —for stocks and bonds to move in different directions. When large institutional investors feel good about things, they tend to buy stocks with the expectation of future earnings and profits. When they are more concerned, they move vast sums to safety, which for decades has meant U.S. Treasury Bonds. The obligations of the U.S. government have long been the “gold standard” for financial security and the world’s undisputed definition of a politically risk-free asset. Through close elections, major policy shifts, wars, terrorist attacks, pandemics, excessive debt and mortgage meltdowns, the strength of U.S. economic and political institutions has at times been challenged but inevitably reigned supreme. That is, at least, until the morning of Wednesday, April 9, 2025.

As the tariff fiasco unfolded early in that week and it became apparent that even greater fiscal deficits were likely on the horizon, the equity markets saw dramatic drops and investors shifted into bonds. The results were painful and quite unnecessary, but at least predictable.

Then, on that fateful Wednesday morning, as yet more tariff chaos was unveiled, the unthinkable happened. Stock prices dropped (as expected), but money did not flow into bonds. The significance of this change cannot be overemphasized. The global markets were essentially saying that they no longer viewed the United States as the ultimate safe haven, with such implications as (1) the capacity of the U.S. to fund its ever-increasing debt being called into question, (2) U.S. leadership in international economic affairs falling into jeopardy, and (3) without any other realistic candidate to underpin world economic stability, the capacity for sustained growth suddenly called into question.

Fortunately, alarm bells went off, many of the tariffs were rapidly deferred, the stock market turned sharply around, and the immediate crisis was averted. Nonetheless, we were put on notice that markets no longer automatically turn to U.S. securities in times of crisis, which is a fundamental shift. This change is not something that the Federal Reserve can fix by tinkering with short-term interest rates. Less chaos, increased positive international leadership and engagement, and more fiscal discipline are paramount to assure ongoing U.S. prosperity and, indeed, global economic viability. Stay safe!

Dr. Ray Perryman is president and CEO of the Perryman Group, an economic research and analysis firm based in Waco.