The second quarter started off with the so-called “Liberation Day” tariff announcement on April 2nd and the resulting market volatility (some indices were down 20% or more at the time) and it finished off almost three months later with all major markets trading higher. International stocks led the way for the second quarter in a row with a return of +12.1%, followed by domestic stocks +10.9%, small cap stocks +8.5% and bonds +1.2%.1
There were a variety of economic factors that contributed to that significant rise but none more so than the three-month reprieve from the tariffs which was provided to most countries allowing for new trade agreements to be negotiated. That extension allowed trade tensions to lessen and for new trade agreements to be established (most notably China, Canada, Great Britain and Vietnam). There is still more work to be done and we would not be surprised to see more volatility arise over the coming days, weeks and months as new agreements are hopefully put into place with our major trade partners.
On the economic front, we also saw some positive data points which helped fuel market growth. The most meaningful was inflation which remained unchanged at +2.8% for the third straight month. We also had encouraging developments in the labor market as evidenced by the most recent data release on Thursday July 3rd, when we saw the unemployment rate drop to +4.1% while payrolls increased by 147,000. 2 The 4.1% unemployment rate hit the lowest level since February. Given both of those strong statistics, we expect the Federal Reserve to cut rates later this year. In fact, Federal Reserve Chairman Powell mentioned that the Federal Reserve would have cut rates earlier in 2025 if not for the tariff uncertainty and the unknown potential longer-term impact. 3
As mentioned earlier, we also expect volatility to increase as earnings season begins, and the so-called “One Big Beautiful Bill” begins to be digested by the markets. Despite those potential headwinds (or tailwinds depending on how they turn out) we remain confident in our diversified asset allocation approach. Having a diversified asset allocation has been especially helpful this year as our allocation to the international markets has rewarded investors with above average returns year to date after struggling for the previous few years.
As always, we are grateful for your trust and partnership. Should you have any questions or wish to schedule a portfolio review, please do not hesitate to reach out. Enjoy the balance of the summer.
1Market segment (index representation) as follows: Domestic Large Company Stocks (S&P 500), Domestic Small Company Stocks (Russell 2000) International Stocks (MSCI EAFE) Domestic Bonds (Bloomberg Barclays US Aggregate Bond Index) Growth Stocks (Russell 1000 Growth) Value Stocks (Russell 1000 Value)
2 https://www.bls.gov/news.release/pdf/empsit.pdf
3 https://www.nbcnews.com/business/economy/trumps-tariffs-kept-fed-cutting-rates-jerome-powell-says-rcna216220
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