Key Points:
Economic and Market Current Status
Federal Policies and Tariff-Driven Inflation
Tariff Impact on Consumers
Deficit-Driven Bond Yield Pressure
Japanese Bond Market's Impact on US Market
Market Expectations and Investment Environment
Retail Investors' Dominance in Stock Market
Investment Recommendations
Economic and Market Current Status
The US economy typically maintains growth, with historical data showing that for about 90% of the time since World War II, the economy has been in an expansion phase, with an average annual growth rate of approximately 2.5%-3%. However, about 10% of years experience recession due to external shocks like financial crises, pandemics, or policy changes, leading to reduced economic activity and decreased consumption. Currently, the market is focused on whether the newly announced tariff policies of the Trump administration (such as the 50% tariff on the EU, suspended until July 9, 2025) will cause economic contraction. Analysis indicates that the probability of economic recession is around 20%, lower than the previous 50% expectation, but tariffs may drive up prices and create inflationary pressures. Inflation particularly impacts low-income groups, with National Retail Association data showing that 50% of US retail sales in 2024 are contributed by the top 10% income group, indicating historically high wealth concentration, making low-income groups more sensitive to price increases.
Federal Policies and Tariff-Driven Inflation
The market expects the Federal Reserve to cut rates 2-3 times in 2025, but due to potential tariff-induced inflation, the Fed may maintain the current 4.25% federal funds rate. In the first and second quarters of 2022, US GDP contracted by 1.6% and 0.6% (later revised to slightly positive), but with inflation rising from 3% to 9%, the Fed still raised rates by 75 basis points each time, demonstrating its priority of controlling inflation. Currently, federal funds futures show a less than 10% probability of rate hikes in June 2025, 25% in July, below 50% in September, and only about 55% probability of a rate cut on October 29. Tariffs may cause a one-time price shock, with data indicating that product prices from China increased significantly from May 1, 2025, with the overall Consumer Price Index (CPI) rising 0.7% within 25 days, from 1.3% to 2.1%. If companies continue to pass on costs or use tariffs as a reason for price increases, this could lead to "unanchored inflation," meaning widespread price increases that force the Fed to maintain high interest rates.
Tariff Impact on Consumers
Tariffs are paid by importers, with some costs transferred through the supply chain to domestic businesses and consumers. Corporate profit margins are currently at historical highs (S&P 500 companies' average net profit rate is about 12% in 2024), enabling them to absorb some tariff costs but tending to pass these costs to consumers. Truflation and PriceStats data show significant increases in imported goods prices from May 1, 2025, with CPI rising 0.7% in less than a month. Tariff policies aim to encourage domestic production and motivate consumers to buy domestically produced goods not affected by tariffs, potentially changing consumer behavior. For example, Trump's policy exempting US-made products from tariffs might drive consumers towards domestic goods, alleviating price pressures. However, consumers, especially low-income groups, may still face price increases in the short term, as imported goods constitute a higher proportion (about 30%-40%) of their consumption basket.
Deficit-Driven Bond Yield Pressure
The US federal government's 2024 fiscal year budget is approximately $7 trillion, with tax revenues around $5 trillion, creating a deficit of $2 trillion, about 7% of GDP. The deficit is expected to increase to $2.5 trillion in the coming years, representing 8%-9% of GDP. High deficits increase bond market funding demands, driving yields up. In May 2025, 10-year Treasury yields have already exceeded 5%, reflecting inflation expectations (market anticipates 2025 CPI around 3%) and rising risk premiums (term premiums). The bond market needs to absorb substantial government debt, with financing needs estimated at $2.5 trillion annually in 2026-2027. To attract funds, yields may further rise to 5.5%-6%, higher than the historical average (10-year Treasury yield average of about 6% from 1960-2020).
Japanese Bond Market's Impact on US Market
The Japanese bond market (JGB) volatility significantly potentially impacts the US market, as Japan is the largest foreign holder of US Treasuries, holding approximately $1.13 trillion (end of 2023 data). In May 2025, Japan's ultra-long-term government bonds (20, 30, 40-year) yields reached historical highs of 2.555%, 3.14%, and 3.6% respectively, with the 20-year bond auction showing weak demand (bid ratio lowest since 2012), reflecting investor concerns about fiscal sustainability (Japan's debt/GDP ratio reaches 260%, far exceeding the US's 120%). The Bank of Japan (BOJ) is gradually exiting bond purchase programs (reducing to 3 trillion yen monthly from 2024), exacerbating market liquidity decline and causing yield spikes.
Japanese investors (especially life insurance companies and pension funds managing over $2.6 trillion in assets) are reducing US debt investments due to rising domestic yields and increased hedging costs from yen volatility (first quarter 2025 yen volatility rose to 10%), net selling foreign bonds worth 902.7 billion yen (about $61 million) in March 2025. If Japanese investors continue selling US Treasuries and shift to high-yield JGBs, this could intensify liquidity pressure on the $28.6 trillion US Treasury market, pushing up US bond yields (30-year Treasury yield reached 4.83% in May 2025).
Additionally, the massive "yen carry trade" (borrowing low-interest yen to invest in high-yield US Treasuries) developed during Japan's long-low-interest environment is estimated to involve trillions of dollars. Rising JGB yields reduce carry trade attractiveness, triggering "carry trade unwinding," causing fund repatriation and yen appreciation (USD/JPY dropped from 160 to 157.75 in May 2025). This might reduce US stock market liquidity, as quantitative funds often borrow yen to invest in US stocks, with May 2025 US stock trading volume declining about 5% related to this. If Japan further reduces US debt holdings, combined with the US's $8 trillion debt refinancing needs, this might force the Fed to intervene (like restarting quantitative easing), increasing money supply, raising inflation expectations, and further elevating US bond yields in a vicious cycle.
Market Expectations and Investment Environment
The zero interest rate and quantitative easing policies from 2010-2022 (Fed's balance sheet growing from $1 trillion to $9 trillion) shaped an unusually low-interest environment, while the current 5% Treasury yield is close to historical norms (interest rate history shows a 4%-6% average over 5000 years). The market needs to adjust expectations for low rates, accepting the "456 market": cash (money market funds, Treasury bills) annual returns around 4%, investment-grade bonds (including Treasuries, corporate bonds, mortgage-backed securities) around 5%, stock market (S&P 500) around 6%. The 2024 stock market total return is close to zero (as of late May), far below 2023's 25%, reflecting high valuations (S&P 500 P/E ratio around 22 times) and policy uncertainties. Investors must accept lower returns and higher volatility, with active management strategies potentially outperforming passive investment.
Retail Investors' Dominance in 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 widespread social media information. In 2024, retail investors account for about 20%-25% of US stock trading volume, up from 10% in 2010. JPMorgan Chase data shows that after a 1.5% US stock market decline on a certain trading day in 2025, retail accounts invested $4 billion within 3 hours, driving the market to close higher. Retail investors are mostly young (under 40), tend to engage in short-term trading such as leveraged ETFs and zero-day expiration options (0DTE), accounting for about 30% of options market volume. Social media (like X platform) creates a group effect, amplifying "buy the dips" behavior. However, historical evidence suggests that periods of retail investor dominance (such as the 2000 tech stock bubble) are often accompanied by excessive speculation and market correction risks.
Investment Advice
Investors should adjust expectations, accept 4%-6% returns, and allocate assets based on risk tolerance:
- Cash
Money market funds or Treasury securities offer about 4% risk-free returns, suitable for conservative investors.
- Bonds
Investment-grade bonds (a $30 trillion market) provide about 5% returns, with 2024 returns at 1.5% and 2023 at 1%, with lower volatility than the stock market, suitable for cautious investors.
- Stock Market
S&P 500 expected annual return is 6%, but may involve 20% volatility (such as decline and rebound in 2024). Actively managed ETFs (like 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 tech stock bubble, 18 years in 1966), investors need to consider life cycle and goals. Investors over 70 should increase cash and bond allocation, while those under 35 can diversify risks through long-term regular investments.
- Addressing Japanese Bond Market Risks
Given potential JGB volatility that may raise US bond yields, it is recommended to reduce long-term US bond exposure and increase short-term Treasury or inflation-protected securities (TIPS) allocation to hedge against inflation and yield increase 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 have weak competitiveness in the fixed income market. Market cyclicality requires investors to avoid single strategies and focus on diversified allocation.
