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During the week of May 26–May 30, 2025, the best-performing asset classes were (see Table 1):

The worst-performing asset classes for the week were:

This week also marked the end of the second quarter of 2025. For the quarter, Bitcoin was the top-performing asset, surging by 27%. The second-best performer was the NASDAQ-100, up 10.7%, followed by MSCI Canada, which gained 10.3%.

Despite Bitcoin’s strong quarterly rally, its year-to-date (YTD) performance is only up 7.4%, highlighting the asset’s extreme volatility. Such volatility is often viewed as a risk factor for investors.

Disclosures:

This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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During the week of May 19–May 23, 2025, the best-performing asset class was gold, with the iShares Gold Trust ETF (ticker: IAU) up 5.3% (see Table 1). Growing U.S. debt and high interest rates have made gold an attractive hedge against downside risk in both equities and bonds. Traditionally, long-term U.S. Treasuries have been viewed as a recession hedge. However, the increasing federal deficit and inflationary risk make long-term Treasuries riskier. Investors are demanding higher interest rates to compensate for growing U.S. debt and the rising cost of refinancing for the Treasury Department.

The second-best performing asset class was Bitcoin. The iShares Bitcoin ETF (ticker: IBIT) rose 4.4%, supported by a weaker U.S. dollar and growing trade tensions, which have boosted Bitcoin’s appeal as a potential alternative currency.

European equities were the third-best performing asset class, with the MSCI Europe Index up 1.2%. The European Central Bank has gradually lowered interest rates from 4% to 2.25% over the past 18 months, with European countries aiming to stimulate economic growth. Additionally, trade tensions between the U.S. and other nations could create new opportunities for European economies.

The biggest loser of the week was the Russell 2000 Index, which tracks small-cap companies with market capitalizations between $300 million and $2 billion. The ETF (ticker: IWM) fell 3.5%. Protectionist trade policies may not be benefiting smaller firms, and economic uncertainty and high interest rates weigh more heavily on them than reduced competition helps. Large-cap stocks also declined: the Total U.S. Market ETF (VTI) dropped 2.6%, the S&P 500 fell 2.5%, and the NASDAQ-100 declined 2.4%.

Long-term U.S. Treasury bonds lost 2% for the week and are down 7% for the second quarter to date. The yield curve is steepening, with long-term yields rising faster than short-term yields (see Table 2). While investors are still comfortable holding short-term U.S. debt earning over 4%, they require higher yields for long-duration debt.

High interest rates are worsening the federal deficit, as the government continues to run a negative budget. In fiscal year 2024, the government spent $6.75 trillion but collected only $4.92 trillion in revenue, resulting in a $1.83 trillion deficit (Fiscal Data). That means the government spent 37% more than it earned. When spending exceeds revenue, the shortfall adds to national debt, requiring additional borrowing.

As of March 2025, U.S. public debt is 121% of Gross Domestic Product (GDP) (see Chart 1). This rising debt, combined with high interest rates, creates a compounding issue where the government must borrow not only to fund spending but also to cover interest payments. To put it in personal finance terms: imagine someone named John earning $100,000 per year, spending $137,195 annually, and borrowing at 4.5% interest to make up the difference.

President Trump has advocated for Federal Reserve rate cuts to reduce the cost of borrowing. However, investor demand for U.S. debt may be weaker this time due to a downgraded credit rating, rising debt levels, persistent inflation risks, and unpredictable fiscal policy. As a result, alternatives such as gold and foreign markets may appear more attractive to investors.

References:

European Central Bank. https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html

Fiscal Data. https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

U.S. Office of Management and Budget and Federal Reserve Bank of St. Louis, Federal Debt: Total Public Debt as Percent of Gross Domestic Product [GFDEGDQ188S], retrieved from FRED, Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/GFDEGDQ188S, May 25, 2025.

Disclosures:

This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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During the week of May 12 – May 16, 2025, technology stocks experienced significant positive appreciation, driven in part by relaxed export restrictions and deal-making initiatives by President Trump (see Table 1).

Top-Performing Asset Classes:

The biggest loser for the week was gold, which experienced a decline after a period of record-setting gains. The outlook for gold is uncertain. Factors such as rising inflation, substantial and increasing government debt, and potential further credit rating downgrades could support higher gold prices in the future. Conversely, if the economy improves, tax revenues increase, and inflation remains under control, gold may continue to decline.

Worst-Performing Asset Classes:

Conclusion:

Asset class performance can be highly volatile and unpredictable from one week to the next. Just because gold has increased by 20% year-to-date does not guarantee continued gains in the coming weeks.

Disclosures:
This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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During the week of May 5 – May 9, 2025, the major economic news was that the Federal Reserve maintained its interest rate range between 4.25% and 4.5%. The Fed emphasized that while the current economy appears stable, the future remains highly uncertain. This uncertainty is driven by concerns about U.S. tariffs and the reliability of economic data from the first quarter, which was distorted by temporary pull-forward demand from consumers and a surge in imported goods aimed at avoiding tariffs. Both the Fed and many companies are adopting a “wait-and-see” approach.

Top-Performing Asset Classes:

Bitcoin led the winners, benefiting from renewed interest and positive sentiment in the cryptocurrency market. West Texas Intermediate Oil had a bounce-back recovery from a sold-out position. Oil is still down by 14% in the second quarter, while Gold continued its upward trend, driven by its status as a safe-haven asset, inflation hedge and alternative to US treasury bonds.

Worst-Performing Asset Classes:

India’s equity market was down 2.9%. Long-term U.S. Treasury Bonds declined amid rising interest rate expectations to compensate for inflation and government debt increase, while the S&P 500 saw a modest decline due to ongoing market volatility.

Second Quarter (April 1 – May 9, 2025) Performance Highlights:

Bitcoin has clearly established itself as the top-performing asset class so far in the second quarter of 2025, significantly outpacing other asset categories.

Conclusion: Investors should remain aware of the ongoing uncertainties surrounding tariffs, economic data reliability, and Federal Reserve policy. Diversification remains key in this market environment.

Disclosures:
This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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The Federal Reserve announced today that it will maintain its short-term interest rate within the range of 4.25% to 4.5%. Federal Reserve Chair Jerome Powell described the economic outlook as “highly uncertain” but also noted that the economy remains stable. On the positive side, unemployment is low at 4.2%, which Powell characterized as being near maximum employment, fulfilling the Fed’s first mandate. The second mandate, inflation, remains elevated but manageable at 2.3%, according to Personal Consumption Expenditures (PCE) inflation data from the Bureau of Economic Analysis. The Fed’s target for inflation is 2%, meaning that inflation is slightly above target but not alarmingly high.

Given these conditions, the Federal Reserve’s decision to hold interest rates steady is consistent with its approach of responding to existing data rather than acting proactively. Both employment and inflation are within acceptable ranges, justifying the current policy stance.

What Should Investors Do?

Investors, like the Federal Reserve, should maintain caution. Predicting the future is difficult, and while the Fed has the flexibility to cut rates if economic conditions worsen or raise them if inflation accelerates, investors should prepare for a range of possible outcomes.

One scenario that investors must be prepared for is stagflation – a combination of stagnant economic growth, high inflation, and rising unemployment. Should this occur, Powell indicated that the Fed would conduct a cost-benefit analysis to determine the most appropriate policy response, even if it means making difficult trade-offs between employment and price stability. You can read the article that I published earlier on the risk of stagflation here: “Is stagflation around the corner?”

The Biggest Uncertainty: Exogenous Factors

Currently, the most significant uncertainty for the economy comes from exogenous factors such as trade policies and immigration laws. These policies can change rapidly, sometimes even before their scheduled implementation dates, creating high volatility and unreliable data for economic forecasting. This uncertainty may dissipate in a few months, leading to low inflation and strong economic growth, which will be favorable for stocks but challenging for gold. Also, considering that gold has already rallied by 26% YTD as of May 7th 2025. Alternatively, prolonged uncertainty could trigger a negative feedback loop, where declining consumer confidence reduces spending, further slowing growth.

Consumer Spending and Its Economic Impact

Consumer spending accounts for approximately 68% of U.S. Gross Domestic Product (GDP). In the first quarter of the year, consumer spending surged, partly due to expected price increases from tariffs. This increase in spending was likely temporary. In addition to the reversal of consumer spending, the rising anxiety and weaker economic growth could cause future consumer spending to decline significantly, further pressuring the economy.

Diversification and Asset Allocation

Maintaining a diversified portfolio with an appropriate asset allocation is critical. Based on my recent research paper, “Asset Allocation Based on 20 Years of Market Data,” certain asset classes have demonstrated strong risk-adjusted returns in recent years. These include:

These asset classes may offer valuable diversification benefits in a volatile market environment.

Yield Curve: A Reliable Recession Signal?

The 10-Year vs. 3-Month yield spread has recently returned to flat territory. Historically, since 1982, each time this spread inverted and then reverted to positive, a recession has followed (see Chart 1).

Meanwhile, the 10-Year vs. 2-Year spread has steepened significantly. One explanation for this steepening is that investors are buying short-term bonds more aggressively than long-term bonds, possibly due to concerns about inflation and government debt sustainability (see Chart 2).

Long-term bonds face a dual challenge:

One way to mitigate this risk is through Treasury Inflation-Protected Securities (TIPS), which offer inflation-adjusted principal. However, TIPS are still susceptible to losses if interest rates rise.

Conclusion

The economic outlook remains uncertain, with the Federal Reserve maintaining a cautious stance and being prepared to react to what lies ahead. Investors should focus on diversification, stay informed, and recognize that the future may differ significantly from the present. Past performance of asset classes may not predict future success (Asset Allocation Based on 20 Years of Market Data). Therefore, maintaining an asset allocation strategy that accounts for inflation and provides a positive risk-adjusted return, consistent with your risk tolerance and return objectives, is essential.

References

Disclosures:
This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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In this research paper, I analyze 20 years of stock market returns, divided into four periods of five years each, spanning from 2005 to 2025. For each period, I derive the optimal asset allocation based on the highest Sharpe Ratio. The objective is to determine whether a particular allocation delivers superior risk-adjusted returns and to provide insight into how portfolios can be constructed using historical data.

The most recent five-year period included inflation and significant interest rate hikes in 2022, which caused the S&P 500 to fall by 25%. Additionally, there was a pullback in the technology sector with the NASDAQ down 15%, and the bond market declined by 13% due to rapid Federal Reserve rate hikes.

The optimal asset allocation for this period was as follows (see Table 1):

• 16% in NASDAQ-100 ETF (QQQ)
• 53.5% in Gold ETF (IAU)
• 12% in U.S. Oil Fund (USO)
• 18.6% in MSCI India ETF (INDA)

This portfolio achieved a standard deviation of 13%, which was lower than that of any individual ETF in this allocation. Its expected return was a high 21%, with a Sharpe Ratio of 1.39 — the highest among all periods analyzed (see Table 2).

This period included the COVID-19 crash in early 2020, when the S&P 500 dropped 34%, as well as the 2018 correction driven by rate hikes and trade tensions that resulted in a 20% market decline. The optimal asset allocation during this time was (see Table 3):

• 25.6% in NASDAQ-100 ETF (QQQ)
• 60.4% in U.S. Long-Term Treasury ETF (TLT)
• 14.0% in Gold ETF (IAU)

This portfolio had a Sharpe Ratio of 0.77, a standard deviation of 6.26%, and an expected return of 6.81%. The portfolio’s volatility was significantly lower than that of any individual ETF it included, illustrating the benefits of diversification. Despite the challenging environment, the return remained relatively attractive (see Table 4).

This period featured the 2011 U.S. Debt Ceiling Crisis, during which the stock market fell by 19%. The optimal allocation for this period was (see Table 5):

• 61% in Long-Term U.S. Treasury Bonds ETF (TLT)
• 39% in NASDAQ-100 ETF (QQQ)

This portfolio achieved a Sharpe Ratio of 0.83 and a standard deviation of 6.31%, again lower than the standard deviation of either ETF alone. This demonstrates how combining equities and bonds can lower overall volatility without sacrificing return much. The expected portfolio return was 7.66% (see Table 6).

The global financial crisis defined this period, with the S&P 500 down 57% at its worst. Due to the limited availability of ETFs during this time, not all categories were tested. The optimal portfolio was (see Table 7):

• 83.6% in Gold ETF (IAU)
• 16.4% in MSCI Latin America ETF (ILF)

Despite limited diversification, this portfolio had a favorable risk-adjusted return (see Table 8), benefiting from gold’s strong performance during the crisis.

The four asset allocations analyzed each produced Sharpe Ratios between 0.8 and 1.4, indicating strong risk-adjusted returns over the past 20 years (see Chart 1). Each portfolio also had a lower standard deviation than the individual ETFs it contained, showing the power of diversification (see Chart 2 and Table 9).

There is no single “perfect” asset allocation that works in all market environments. As shown in Table 10, optimal allocations shifted significantly from one period to the next. Even a seemingly ideal allocation today is based on historical patterns that may not repeat in the future.

Using a weighted average of the four optimal allocations, I  arrive at the following portfolio:

• 20.2% – Invesco QQQ Trust (QQQ)
• 37.8% – iShares Gold Trust (IAU)
• 3.0% – United States Oil Fund (USO)
• 4.6% – iShares MSCI India ETF (INDA)
• 30.4% – iShares 20+ Year Treasury Bond ETF (TLT)
• 4.1% – iShares Latin America 40 ETF (ILF)

This allocation is unconventional and may not be comfortable for all investors due to its heavy exposure to gold and long-term Treasuries. However, it reflects the asset classes that most consistently delivered strong risk-adjusted returns across multiple market cycles based on the past 20 years of market data.

One key takeaway is that the asset classes that performed best in the past may not continue to do so in the future. The ‘optimal’ allocation is dynamic, not static. The three asset classes that contributed most to historical risk-adjusted performance were:

• Invesco NASDAQ-100 ETF (QQQ)
• iShares Gold Trust (IAU)
• iShares 20+ Year Treasury Bond ETF (TLT)

This research supports the view that strategic allocation should remain flexible, rooted in history but responsive to change.

Disclosures:
This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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As I have discussed in section 14, the stock market is informationally efficient. The efficient market hypothesis gained even more strength recently with the technological advances in commission-free trading, fiber-optic internet speed, and greater market participation. Most of the historical information is immediately reflected in the stock prices.

Besides being informationally efficient, the stock market is also a forward-looking indicator. Analysts evaluate stock prices based on companies’ future revenue growth and profitability expectations. Active investors position capital into securities of companies they feel could benefit from future growth. As a result, today’s stock prices reflect not only historical information but also future expectations.  

Conclusion:

The fifteen investing principles create the foundation of investing. Before you go on to build your wealth castle, you need to understand how to build a strong foundation. This is the starting point of your investing journey. The learning process of being a successful investor only starts here and continues through your life.

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During the week of April 28 – May 2, 2025, fixed income, gold, and oil lagged, while international and domestic equities outperformed (see Table 1).

The worst-performing categories were:

The top-performing categories included:

Interestingly, for the second quarter to date, the best-performing asset class is Bitcoin, up 17.9%, while the worst-performing is Oil, down 17.2%.

(Table 1, Winners and Losers for the week April 28 – May 2, 2025)

Disclosures:
This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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The stock market is informationally efficient. It reflects nearly all available public information in stock prices. You have an opportunity to know about the company and the stock price as much as anybody else can legally. For beginner investors, selecting broadly diversified ETFs with low costs is probably the best way to start investing. Eugene F. Fama won Noble Prize in Economics for his work on the efficient market hypothesis. According to Fama, the stock prices fully reflect all available information if the following conditions are met: 

According to Fama, markets may still be efficient even if the sufficient number of investors meet the above three conditions (Fama 1970). Fama showed that the financial markets may fully reflect past prices and return history, and publicly available information. It is highly unlikely that past price data may predict future stock performance consistently and with high enough profitability margin. Only monopolistic access to information may not be reflected in stock prices. The example of such information is the specialist’s confidential book information about submitted limit orders to buy and sell stock (Fama 1970). The specialist’s book information is material and nonpublic. Retail and institutional investors do not have the monopolistic access to information.

            However, it is possible to have information which is not immediately reflected in the stock prices. According to Fama, there can be informational signals that are not immediately accepted by the stock market. In this case, the future value will be higher than present value. It is the analyst’s job to interpret information correctly and take advantage of investment opportunities over time.  

In the long run, the stock market may provide an opportunity to profit. If you are willing to do the homework and learn financial statement analysis and economics, you may try to outperform the market by selecting individual securities. One way to do that is to interpret information correctly and define information which is not currently reflected in the stock price. When you discount the future information to present time, you can compare your target price with the market price. If your target price is significantly higher than the market price, you may decide to purchase this security. After the purchase, you will have to wait for the market to realize what you have forecasted. If your predictions are correct, the future stock price will move closer to your target price. Here are some of the risks in trying to outperform the market:

References:

Fama Eugene F. Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417

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The stock market has been highly volatile. As of April 30, 2025, the S&P 500 Index has recovered 62% of its losses from the year’s low, yet remains approximately 9% below its year’s high. With new Gross Domestic Product (GDP) data released today, this presents an opportune moment to assess whether the S&P 500 is expensive or cheap relative to the broader U.S. economy.

To answer this, I applied a GDP-based linear regression model to estimate where the S&P 500 should be trading in the second quarter of 2025. The goal is to assess whether the market’s current price aligns with economic fundamentals, particularly nominal GDP, a key indicator of the economy’s overall size and health.

Using GDP as a valuation anchor for the S&P 500 is both conceptually logical and statistically sound. I developed two linear regression models for this analysis: one based on ten years of quarterly data and another using twenty years. This dual approach captures both recent economic dynamics and longer-term structural trends, especially relevant as U.S. policy shifts increasingly toward domestic growth and protectionism.

Estimating Q2 2025 Nominal GDP

To run the models, I first estimated nominal GDP for Q2 2025. According to the Federal Reserve’s latest economic projections, real GDP for the full year is expected to grow between 1.5% and 1.9%, while the Personal Consumption Expenditures (PCE) price index is forecasted to rise between 2.6% and 2.9%. This implies nominal GDP growth in the range of 4.1% to 4.8%. Dividing this by four yields a reasonable estimate for quarterly GDP growth used in the model.

10-Year Model Results

Using data from the past ten years, the model forecasts that the S&P 500 Index should trade between 5,577 and 5,592 in Q2 2025, with a midpoint of approximately 5,584 (see Table 1). This implies a modest upside of 0.27% from current levels.

Statistically, the model is robust: the R-squared value is 0.88, indicating that GDP explains 88% of the variation in the S&P 500 over this period (see Table 2). The Significance F value is near zero, suggesting the model is not the result of random chance. Furthermore, the p-values for both the intercept and GDP variable are also near zero, affirming the statistical significance of GDP in explaining the index’s performance.

20-Year Model Results

When extending the model to the past twenty years, the results indicate the S&P 500 is overvalued by approximately 1.5% (see Table 3). Interestingly, this longer-term model is even stronger statistically, with an R-squared of 0.94, meaning it explains 94% of the S&P 500’s variation over the period (see Table 4).

Although the 20-year model suggests slight overvaluation, both models paint a consistent picture: the S&P 500 is currently trading close to its fair value based on expected GDP.

(Table 4: Summary statistics for the 20-year model)

Conclusion

Based on these findings, the market does not appear significantly undervalued relative to the size of the U.S. economy. However, uncertainty remains elevated, and the risk of an economic slowdown is high. Currently, the stock market does not seem to be pricing in the possibility of a downturn, leaving room for potential downside surprises that are not yet reflected in the stock prices.

While this type of model is not a crystal ball, it is a useful tool for evaluating whether market valuations are supported by economic fundamentals. As of now, the market appears fairly valued, offering limited reward for the level of risk being taken. Investors should remain cautious, especially in the near term.

Data Sources:

Disclosures:
This analysis is based on historical data and forward-looking estimates that may not materialize. This content represents the author’s opinion only and is not guaranteed to be accurate or complete. Please consult a qualified financial advisor before making any investment decisions. Neither ECNFIN.com nor the author assumes liability for any actions taken based on this information. Past performance is not indicative of future results.

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