BACK
Second Quarter Review: The Standard and Poor’s 500 Stock Index experienced a sharp decline out of the gate but then rallied to a return of 10.9% in the second quarter. Other equity benchmarks followed a similar path as the Russell 2000 Small Cap Index gained 8.5% and the MSCI All World ex-US index rose 12.3% boosted by the 5% drop in the U.S. Dollar Index. The Bloomberg Aggregate Bond Index returned 1.2%, Gold rose 5.8% and the Bloomberg Commodity Index fell 3.1%. Technology stocks reasserted their dominance in the quarter as companies associated with the adoption or development of artificial intelligence saw their valuations expand. The tech sector reversed from a one-year low to a one-year high in only 52 sessions, which was the second fastest occurrence of this in history. Returns for the first six months of 2025: S&P 500 Index 6.2%, Russell 2000 Small Cap Index -1.8%, All Country ex-US International Index 18.3%, Bloomberg Bond Index 4.0%, Gold 25.9%, and Bloomberg Commodity Index 5.5%.
The Resilient Stock Market: Midday April 7th, the S&P 500 was down 13% for the first five trading days of the quarter and 21% from the mid-February highs. The recovery coincided with President Trump’s announcement of a 90-day reciprocal tariff moratorium along with reports of constructive trade discussions with China. The S&P 500 rallied nearly 25% into quarter-end, marking the strongest intra-quarter rebound on record. There was no shortage of newsworthy events during the quarter, all of which were positively absorbed by the markets. First quarter GDP showed a contraction of 0.5%, however, this reflected the impact of domestic inventory buildup prior to tariffs becoming effective while second quarter GDP should approximate 2%. S&P 500 earnings were strong, up 11%, even as companies withdrew their forward guidance pending tariff outcomes. The U.S. followed Israel and bombed Iranian nuclear facilities, but investors were relieved when the conflict did not escalate, and the spike in oil quickly reversed. Finally, Congress passed the One Big Beautiful Bill which included many business-friendly items and extended the 2017 tax cuts which were set to expire at the end of the year.
Fiscal Deficits: The budget bill unfortunately highlights our lawmakers’ capacity to defer the painful measures required to bring the country’s finances into alignment. Fiscal restraint is not advocated by either of our political parties and every year that we “kick the can down the road” will require ever harsher measures. The U.S. has experienced $1 trillion plus budget deficits for each of the past five years and is on the road to $2 trillion deficits shortly. The deficit in fiscal 2024 equaled 6.4% of GDP while outstanding U.S. Treasury debt totaled 121% of GDP. Italy, Greece, and Japan are the only developed nations with a greater percentage of debt to GDP. Servicing this debt, particularly in this higher rate environment than in the recent past, will crowd out other essential spending needs. If this rate of deficit spending continues, we expect it to become an increasingly larger concern for bond and equity investors.
A Changing Backdrop: This issue of the government’s interest costs is likely one motivation behind President Trump’s harassment of Federal Reserve Chairman Jerome Powell to lower the Fed Funds target from the current range of 4% to 4.25%. In the Fed Chair’s defense, the economy has continued to grow, and inflation measures remain above the Fed’s 2% target with the level and the impact of tariffs yet to be determined. The markets have historically functioned assuming an independent Federal Reserve and on the days when the rhetoric has become particularly heated with respect to Powell, the markets have suffered. The global economy is in a state of flux, with traditional macro forces becoming unanchored. The world may be moving away from globalization with unknown impacts on productivity and global price pressures. Global capital flows are therefore changing, new and old global alliances are being tested, and technological innovation is moving at warp speed. Nevertheless, the S&P 500 and Nasdaq trade at valuations that are historically stretched regardless of the measurement applied. This year is another example of the futility of anticipating market performance. Nevertheless, we can’t help but feel that the current gains are borrowing returns from the future. Our focus remains on relative value and maintaining an asset mix reflective of your specific situation and needs.
Thank you for your continued trust and support and we welcome a discussion of your portfolio and the market at your convenience.