Trading in the First Half of 2025 Hints at Risk of Recession

Price action could mean the markets are preparing for an economic downturn

• Stock market performance has been lavishly flattered by a sinking US dollar.
• Falling bond yields point to solid Treasuries demand and incoming Fed rate cuts.
• Crude oil prices indicate traders are more worried about weak growth than geopolitical risk.

The first half of 2025 offered no shortage of twists and turns for global financial markets. Traders found themselves under constant assault from factors ranging from conflict in the Middle East and in Ukraine to a shocking dismantling of global trade norms by the United States, the same country that gave birth to them.

Yet price action in the world’s top markets leaves a different impression than the headlines might suggest. Take stocks. The bellwether S&P 500 rose 5.4% in the first half of the year. That’s a bit higher than the long-term average of 3.7% for a six-month period in the last 25 years.

The tech-tilted Nasdaq fared slightly better. It rose 7.9%, topping the historical average of 5%. All the same, these moves pale in comparison to a dramatic fall in the US dollar. It lost an eye-watering 13.9% against the euro and 9.1% against the yen. Gold, an anti-fiat stalwart, surged 25.2%. These moves vastly outstrip normal six-month swing dynamics.

This reveals that Wall Street performance has been lavishly flattered by the greenback’s weakness. If one’s returns were expressed in another major currency, buying and holding US stocks so far this year would have been a losing proposition. The stocks seem to be enjoying a heroic rally, but the move’s foundation appears vulnerable.

It is tempting to take this as evidence of a “sell America” bias, envisioning capital pouring out of the US amid the Trump administration’s bellicose policymaking. However, this also is not what it seems. Treasury bond yields have fallen across maturities since the beginning of the year, signaling solid appetite for sovereign US assets.

The yield on the benchmark 10-year Treasury bond fell 7.5% in the first half of the year. The rate on the two-year note fell 12.1%. This seems to say two things. First, the markets are quite willing to believe in the faith and credit of the US government and lend it long-term money at friendly borrowing costs. Second, monetary stimulus is ahead.

Finally, for all the fire and fury of Israel’s war with Iran and Washington’s shock decision to engage in the action directly, crude oil prices traded down 9.2% in the first six months of 2025. This seems to show that, whatever supply disruption risk the markets might perceive, they find demand concerns more potent.

Are the markets signaling recession?

Considered together, an ominous way forward seems to emerge. Bold headlines about wars and tariffs increasingly seem like background noise, and the US-based architecture of global finance seems solidly intact. Still, incoming economic pain looks set to rattle appetite for risk and force a reluctant Federal Reserve to act.

The implications for major assets in the second half of the year may be as dramatic as they are unexpected. Stocks may turn lower as traders acclimate to the din of incoming news and refocus on a simple realization: A slowing US economy threatens to stress the single point of failure for global economic growth.

The ensuing “risk off” shift in tone for global financial markets may drive Treasury bonds and the US dollar up in tandem, reviving their appeal as havens of safety and liquidity in times of stress. Perhaps this is why the currency has begun a cautious rebound, even as the markets’ rate cut bets have veered sharply more dovish than those of the Fed.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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