Quarterly Update

What a few months it has been! The first quarter of 2025 ended in a stock market slump with US investor confidence at extremely low levels. Then the second quarter (Q2) began with a thud heard around the world as major tariff announcements on “Liberation Day” shocked just about everyone. Global markets sank and within a week we were looking at a bear market. Then markets recovered… quickly, to a record high at quarter’s end. Incredible. At least from a market perspective, there was a sigh of relief as Q2 closed.

Here's a summary of how major market indexes performed during the quarter and year-to-date, respectively.

• US Large Cap Stocks: up 9.3% and up 6.1%
• US Small Cap Stocks: up 5.8% and down 1.8%
• US Core Bonds: up 2.1% and 4%
• Developed Foreign Markets: up 10.8% and 20.7%
• Emerging Markets: up 7.6% and 12.7%

Tariffs were easily the biggest issue that investors faced during Q2. On April 2^nd the Trump Administration announced plans for new tariffs on nearly every US trading partner in what many worried was an incoherent strategy. New tariffs as high as 145% on imports from foundational trading partners like China, for example, immediately roiled markets. It was too much way too fast for investors to digest. Understandably, many indiscriminately sold stocks in the face of tremendous uncertainty. Volaitlity shot through the roof. Within days major US stock indexes like the S&P 500 were down double digits. The Russell 2,000, a proxy for US small cap stocks, hit a bear market by dropping over 20%. Foreign stocks dropped less but the pain of instant uncertainty was felt by all.

One can only imagine the closed-door conversations happening within the White House during the first weeks of April. Reports of the markets being an important barometer for the President were confirmed by a pause to the tariff plan shortly after the initial rollout. That turned things around quickly for investors. Further pauses and renegotiations fueled a surge of optimism, as did solid corporate earnings reports from companies that might not be hammered by tariff uncertainty after all. Just one example was market-darling NVIDIA. The stock was down over 30% for the year during the lows but ended Q2 up over 17%. Other “Magnificent Seven” stocks, such as Meta and Microsoft, also roared back since early April while others, including Apple and Alphabet, are still down for the year.

Across sectors, Technology and Consumer Discretionary took the hardest hits, each down over 20% during early April. Most of the eleven sectors that make up the US stock market dropped by double digits during that timeframe but a few, specifically Utilities, Healthcare, and Consumer Staples, were only down around 3%. However, the subsequent market recovery was broad-based with eight of eleven sectors finishing Q2 positive year-to-date. Industrials were up 11% while Utilities and Financials were each up over 7%. This is good to see after quite a while of broad market performance being dominated by a handful of popular stocks.

Core bond prices held their ground during April and have performed well so far this year. The Barclays Aggregate Bond Index, comprised mostly of Treasurys but also of investment-grade corporate and mortgage-backed bonds, was up nearly 4% year-to-date. Riskier parts of the bond market, such as preferred stocks and longer-term Treasurys, didn’t fare as well and finished Q2 down nearly 4% and 2% so far this year, respectively. The primary reason for the good performance from core bonds is that inflation has continued to come under control and investors are coming to grips with a “higher for longer” interest rate policy from the Federal Reserve. Investors expressed fears about how an inflation spike and a tariff-induced recession this year could impact bond prices, but those concerns largely evaporated along with the administration’s initial tariff plans. The bond market was stable enough to look through the final member of the “Big Three” ratings agencies downgrading the US’s credit rating in May. The yield on the benchmark 10yr Treasury Note began the year at roughly 4.8% before declining to 4% immediately following “Liberation Day”. The yield rose subsequently to 4.6% around the debt downgrade before settling in at about 4.3% as Q2 ended. Bond prices move opposite yields so this relative stability helped performance during the quarter. “Cash” investments like money market funds and bank CDs paid at roughly a 4% annual rate during Q2. That cash yield is expected to remain perhaps until this Fall assuming the Fed lowers interest rates then, but that isn’t a given.

The market volatility we experienced during Q2 was painful but brief, of course only in hindsight. Outcomes could have been much worse and there were several “are the wheels coming off?” moments along the way. Market analysts I’ve been following for years were dumbfounded first by the administration’s plans and then by the market’s response; it all happened so quickly and keeping up with everything proved difficult, even for seasoned pros with a deep bench. What’s an individual investor to do in that sort of environment? Ultimately, the quarter was another lesson in the importance of having a plan and sticking to it, a strategy that’s easier to follow in theory than in practice.

That said, there’s still uncertainty around tariffs and now tax and spending policy as we go into the second half of the year. There’s bound to be more volatility so just be ready for it. Let us know if your plans have fundamentally changed. And as always, if you have questions please ask them.

Have questions? Ask us. We can help.