INSIGHTS

On June 30, 2025

AAM Viewpoints — 2025 Mid-Year Review and Outlook: Hands on the Wheel

Consternation is the state where one is intuitively aware or conversely oblivious. The mind will either make shallow connections from brief experiences or delving deeply into a topic from a historical perspective. The events that have been borne from historical reality cause the intuitive perspective to be concerned about tail events with a strong lean to the catastrophic.

We take note of some of the more profound market moves that do not confirm the intuitive belief of how these events unfurling should influence the markets. For nearly two decades it has been apparent that market events are often attempted to be justified rather than questioned. Perhaps the most dynamic of this is the fascination with one thing during a cycle only to be discarded for the new metric to discern what will occur.

We often also battle the audit part of the process to see where a belief and conclusion were not confirmed. So, is what we saw in the last year over a myriad of examples represent a certain transformation of the innate and insane?

In April alone we saw some significant emotional distress and relief as shown by the following from Jurrien Timmer of Fidelity who is one of the best at offering context on current and historical metrics.

As Nassim Taleb has discussed “The inability to predict outliers implies the inability to predict the course of history.” So, while our minds believe, somewhat misguided so, in the short term that there is a normal distribution to nature, it is the outliers that we paradoxically are so afraid of but always appear surprised by their increased occurrences. Think of the conflicts between ergodicity and entropy occurring daily.

Think of last weekend when the U.S. bombing of Iran bore witness to the reason why one should question the first intuition of reaction and perhaps think in terms of chess rather than checkers. The initial and historical perspective was that oil and energy would spike; equity markets would sell off and Treasuries would rally in price as a flight to safety takes off. Guess what happened? The 10-year Treasury declined by a mere 13 basis points, the S&P 500 went up 3.5%, The CBOE Volatility Index declined 20% and Brent oil declined over 13%. So, while many were baffled, the default answer to the riddle was that the markets were pricing in uncertainty some time ago and now are predicting the ultimate possibility of peace. Which at this moment appears a possibility though we would not be that presumptive since this has been decades in the making and will take more than a few weeks to resolve it. We can hope though.

One other that has risen in the fear of de-dollarization and potential purging of U.S.-based assets by foreigners. For those paying close attention to this, the foreign ownership of Treasuries has been in decline over the last decade. It might surprise many that there has been an increase over the last two years as well. They own roughly a quarter of the outstanding Treasuries, and while significant, it is down from a third and this is in a period of massive increase in debt issuance. In 2015, the U.S. Treasury market was around $18.1 trillion and now stands at $36.2 trillion — a doubling of outstanding debt.

So, who owns it? Well, it’s pretty well diversified currently.

For those concerned about corporate debt owned by foreigners, it stands at 29% of the outstanding, though the majority of this is owned by pensions and life insurance companies that hold and hedge them for a myriad of reasons beyond just being dollar denominated. In 2015, U.S. corporate debt issuance stood at $8.4 trillion and now stands at $14 trillion — a nearly 70% total increase rising 5.20% annually. The percentage owned by foreign holders has risen from 22% in 2015 to 29%. We continue to see increased ownership in a bigger notional amount. One side note is that the fear of China, in particular, selling has been occurring since 2013. At their height, they owned $1.3 trillion in U.S. Treasury debt but now stands at $757 billion or a decline of 42%. For further perspective in 2013 China owned 8.1% of all Treasury debt but now stands at 2.1% of the total.

One of the most revealing charts produced by Bank of America shows just how much foreign ownership of U.S. assets has been dramatic. Since 1991 there has been net buying of $128 trillion in U.S. financial assets.

For those concerned about market warfare, it is understandable; however, there are some backstops before mediation occurs should this event occur. Consider the broad-based unwinding balance sheet assets for several central banks.

In particular, the U.S. Federal Reserve total assets held stands at $6.67 trillion — $2.3 trillion lower than the high set in 2022 and down a total of 26%. As it appears to us that the use of quantitative easing is akin to a credit card where balances get drawn down only to be used in case of an “emergency” and is seen as dry powder in waiting. Right or wrong, the brief history of quantitative easing seems to affirm this.

While macro events have long been a somewhat futile pursuit due to its complexity and multiple chain of events needed to execute in a particular sequence to cause a certain consequence to become reality, it became far more prominent after the Great Financial Crisis of 2007–2009. Considering the externally driven shocks of the last year, we should take solace that the markets survived that period, but not without altering certain components of our economic DNA.

So, as influencers oscillate with accelerated adoption of being a trade expert last week to a master of the Middle East tension, curating sources to obtain information and constructive conjecture is the more noble pursuit. The news headlines that bombard us are more akin to a boomerang than a frisbee as the headlines of the past come back around in this stuck-in-the-mud business cycle.

At the beginning and end of every day, we should be reminded that these unknown events are always lingering. One axiom that seems more prominent is that one should be invested in the markets at all times, or as long that time matches with your horizon and risk tolerance. As history is riddled with constant reminders to be invested in the down times, so you don’t miss the rebounds, the recent recovery of a 15% decline to recover only took 89 days. This is the quickest rebound on record following a significant decline. With increased volatility and its visceral spikes and quick receding, there may be a bit of a different dynamic to portfolios than witnessed in the last four decades. Consider the barbell strategy in which the bulk of assets are allocated to the long-term horizon each investor has and buffer the dynamics of shorter expansions and more dynamic equity markets.

So, unless you’re enjoying your ride in Tesla’s Robotaxi, keep your hands on the wheel.

There are things known and there are things unknown, and in between are the doors of perception. Aldous Huxley

CRN: 2025-0602-12622 R