Q2-2025 Market Results
A much better quarter for the markets compared to last quarter. The S&P 500, our preferred measure of U.S. stock markets, was up +10.94% for the quarter, but only +6.2% year to date (YTD). International markets were up, but unlike last quarter, were lower than U.S. markets at +10.13% for the quarter, but a much stronger +17.71% YTD. Emerging Markets were up strongly at +10.92% for the quarter and +14.23% YTD. Intermediate bonds had a somewhat disappointing positive return for the quarter at +1.21% and +4.02% YTD. Short Treasuries were also up for the quarter at +1.19%, and +2.82% YTD.
Q2-2025 Notes
The S&P 500 started the quarter down but turned around by late April and mainly went up thereafter. Global stock markets had a similar look. Bonds also had a slight dip at the beginning of the quarter but a positive finish afterward, though less strong than stocks. The bond recovery we’ve been expecting since 2022 has still not started.
Let’s get further into this discussion by looking back a little bit. Last quarter, the S&P 500 was down slightly over -4%. International stocks were up almost 7% as we saw a shift in global investing, where capital moved away from U.S. investments and towards international or global investments. The narrative here was entirely about two things: the first being that the tariffs announced on “Liberation Day” of April 2, 2025, represented a significant change in global trade. The second item was that the tariffs announced were aimed as much at U.S. allies as they were at U.S. adversaries. This left many countries and individuals in those countries questioning if the U.S. was as reliable a partner as it has been since the end of World War II. That combined narrative shifted investors and capital away from the U.S., which drove the S&P 500 down. We feel last quarter was totally self-induced on the U.S., given the major tariff announcement on Liberation Day. We don’t fully agree with the narrative, which we will explain further in this letter.
The difference this quarter, and the reason the markets have reversed course, is that the complete trade disaster from tariffs that many economists predicted has not yet occurred. The tariffs have not affected inflation, which many economists also predicted. Granted, President Trump put a 90-day pause on the tariffs the week after Liberation Day, so the tariffs will not come into effect until July 9, 2025. That pause reduced much of the concern regarding tariffs that had been part of the narrative.
Damage Done by Tariffs
Overall, the damage done by tariffs has been much less than expected, which has added to confidence in the U.S. and shifted capital back towards it. Thus, the market is up this quarter. At the same time, Washington has been very excited about the possibility of trade deals coming together with other countries to avoid tariffs expected to start on July 9. So far, we’ve seen one trade deal with the United Kingdom (UK), another with limited details with China, and a very recent announcement with Vietnam, also with limited details.
Rumor has it that negotiations with Japan are underway, but the deal is not coming together. It appears Japan is pushing back on the somewhat “bullying” tactics. Time will tell how it comes together. We feel that the UK trade deal is not much to get excited about, and the China and Vietnam trade deals have too few details to judge them. From our view, the idea that trade deals could come together during the 90-day pause seems naïve. Trade deals often take many months or even years to come together, so trying to get deals with multiple countries done in three months seems like a stretch.
The Fed held rates steady in June, much to President Trump’s chagrin. Overall, the Fed seems quite hesitant to lower rates at this point. We feel their concern about inflation makes some sense, and they also have concerns about how tariffs might affect inflation data, which we also think makes sense. We disagree with President Trump’s statement that Fed Chair Jerome Powell is a problem. Given the economic uncertainty we face, his caution is justified.
Global Outlook
Our global outlook today should reflect on the messy trade situation in Washington. This topic is important enough, and not very well explained, in our opinion, to warrant a place in our letter.
Let’s start by looking back to the end of World War II. At that time, the U.S. was about the only country able to produce goods that the rest of the world needed to rebuild after the war. We allowed those countries to buy from us while we supported Europe’s recovery with the Marshall Plan. At that time, foreign countries were given favorable trade status with the U.S. for good reason.
After the war, as we progressed into the 1950s, the Cold War with the Soviet Union became the most significant factor for U.S. security. At the time, the U.S. decided on a revised approach to trade, which gave favorable trade status to countries that sided with the U.S. instead of the Soviet Union. Remember, it wasn’t just that the U.S. wanted to avoid war with the Soviet Union; the U.S. also wanted to execute the total defeat of communism by the U.S. democratic/capitalist structure. Aligning with as many countries as possible helped the U.S. defeat the communist Soviet Union when it collapsed in 1991.
The Trade Situation
Since 1991, no President has reconsidered the favorable trade deals that so many nations enjoyed. We feel that the trade situation as of 2024 was somewhat unfair and that adjustments to it are reasonable. We’re not sure that declaring tariffs on nearly every nation at once is the best way to make this adjustment, but that’s not our choice to make. In last quarter’s letter, we tried to describe the trade situation with Germany and how it isn’t exactly fair to the U.S. Many countries have been spoiled, and trade adjustments won’t come easily.
Although we may not love the approach, we do feel that bringing countries to the table to negotiate about trade makes some sense. That’s especially true if deals that find a more reasonable compromise on the trade terms can be reached. However, our problem is that so few of these trade deals have come together. It’s virtually impossible for us to judge how the tariff situation is playing out. This leaves us with a significant level of uncertainty as to what the future outcome will be. We’ve been saying since April that we need at least two or three months to judge how this works. It’s been two months, and we don’t have much more clarity. Hopefully, we’ll have more clarity by the end of July.
We don’t fully agree with the current narrative because it is possible that we could see some trade deals come together, and the U.S. trade position could be better than it was before April 2. Is it also possible that the bullying tactics don’t work as hoped and that we end up in something that looks more like a global trade war? Yes. Again, this leaves us with a lot of uncertainty about global trade and the U.S. economy in general.
If we end up in a better trade position, that will be a positive for the U.S. economy, but if we end up in a trade war, that will not work well for the U.S. economy. President Trump is betting an awful lot on his decision to rework global trade. We hope he is right and we are willing to give it time to see, but we’re already two months in and haven’t yet seen a positive outcome. In our view, that’s not a great sign, but we remain hopeful for the potential.
Disclosure: Past Performance is no guarantee of future performance
