The first half of 2025 has been an adventure for investors. Uncertainty over what the new administration’s policies would produce rattled markets in the middle of the first quarter. Then, at the beginning of April, the tariff wars began – and stocks continued to fall, almost reaching bear market (20% correction) territory.
The administration’s on again – off again tariff announcements have kept economists, our trading partners and investors on their toes.
But, Surprise!
The S&P 500 (Total Return) Index gained 10.57% in the second quarter; rallying a dizzying 24% from its “Liberation Day” low in April. And is up 5.5% YTD.
Other Worldly
In a remarkable turn, international equities have dramatically outperformed US equities so far this year. The MSCI EAFE (Developed Markets) Index was up 11.78% in the second quarter and 17.73% YTD. Emerging Markets were up 11.99% in the quarter and 15.27% YTD.
We have always had a reasonably healthy dose of international exposure in our portfolios. That hasn’t paid off recently, as US equities have outperformed international equities over the last fifteen years. But historically speaking, international equities have about a 50% chance of outperforming during any given decade. And like any diversification strategy, by definition, something is always going to be doing better that something else in your portfolio.
One of the main drivers of international performance is the valuation movement of the dollar vs. foreign currencies. All things equal, when the dollar strengthens, your international holdings under-perform. When the dollar weakens, they out-perform. The factors that go into the relative strength of currencies are well beyond this note. But it’s worth keeping an eye on.
Fixed Income
Uncertainty in the stock market is well matched in the bond market. Concerns about the potential inflationary effects of tariffs, the growing federal budget deficits and when/if the Fed is going to lower interest rates continue to confound bond investors.
Despite all this uncertainty, bonds so far are holding their own. The Bloomberg US Aggregate Bond Index gained 1.21% in the quarter and 4.02% YTD.
Our friends at Dimensional Funds have all the data for us once again in their Quarterly Market Review.
Amateur (Not to Mention Professional) Forecasting is a Dangerous Game
It’s Tough to Make Predictions. Especially About the Future, Yogi Berra
That’s one of the great Yogi-isms. But it applied in spades for investors during the second quarter – as fundamental government economic policy seemed to change on a moment’s notice.
Your portfolio should be sturdy enough to get you through difficult markets but still have the ability to achieve your financial goals. It’s good to remember that success is measured in years; not days or even months. Putting up with volatility – not getting pushed around by current events and not changing course — is a necessary evil to achieving long term results. Trying to out guess the markets is far more likely to upend your plan. As one researcher has quipped: Even God would get fired as an active investor.
But now may be a far better time to evaluate your portfolio than when market participants were projecting the worst and panicking back in April. During periods of extreme market gyrations, it is not the best time to be making long-term portfolio decisions. If it makes sense to adjust your asset allocation based on you own personal goals, risk tolerance and time horizon it is preferable to make those changes during periods of relative calm – because volatility can and will return at any moment.
Not Out of the Woods
While the worst of market prognosticators predictions did not come to pass recently, the overall economic/political conditions remain largely the same. It remains unclear exactly where tariff policy will ultimately land. And Congress just passed an enormous piece of tax and policy legislation that some economists believe will increase the deficit by $3.4 trillion over the next decade.
While hiring is holding up, there are signs that the job market may be weakening.
Not to mention the AI elephant in the room. “Artificial intelligence is going to replace literally half of all white-collar workers in the U.S., Ford Chief Executive Jim Farley said in an interview with author Walter Isaacson at the Aspen Ideas Festival. “AI will leave a lot of white-collar people behind.”
And the country is facing a decade or longer of unprecedented non-emergency deficits.
So, while many investors have shrugged off all this turmoil, it is no time to become complacent.
One Big Beautiful Bill Act – Make Sure to Read the Fine Print
I would be remiss not to mention the passage of the President’s new tax and spending bill signed into law on July 4th. It’s too early to share a detailed debriefing of what’s in the new legislation. But there may be less to it than meets the eye, due to caps, limitations and phaseouts. But here are few highlights that may be relevant to our clients:
- Permanent extension of lower rates and brackets from 2017.
- Increase in the standard deduction to $15,750/$31,500.
- Estate and Gift tax exemption made permanent at $15,000,000 (indexed to inflation.)
- SALT deduction increased from $10,000 to $40,000 until 2030, subject to limitations.
- Limitation of itemized deductions for taxpayers in the highest (37%) bracket.
- $1,000/$2,000 charitable deduction for non-itemizers.
- Limitation on charitable deduction for itemizers.
- No tax on tips up to $25,000, subject to limitations.
- No tax on overtime up to $25,000, subject to limitations.
- Senior deduction (age 65 and over). $6,000/$12,000 – subject to limitations.
- QBI made permanent at 20%.
There is a whole lot more, which, as we learn the details, will be covered in a later note.
