Market Update July 17, 2025
If somebody was isolated from all news sources in the second quarter of 2025 and later found out that there was war in the Middle East and a volatile trade war between the U.S. and its trading partners, they would think it must have been a tough quarter for the financial markets. They would have been wrong.
Despite the angst with the geopolitical environment, stocks far and wide had a fantastic second quarter. After a rocky start during which the S&P 500 nearly met the definition of a bear market (down 20% from previous high), this index rallied 10.9% by the end of the quarter. This brought its year-to-date return through the end of June to 6.2%. Established foreign markets as measured by the MSCI EAFE index were up 11.8% in the quarter and up an incredible 19.5% year-to-date. The MSCI Emerging Markets index was up 12.0% in the quarter and 15.3% for the year. Domestic small company stocks as measured by the S&P 600 have lagged behind, up 4.9% for the quarter but still down 4.5% for the year through the end of June.
Much of the strength in the foreign market returns has been attributable to a weakening of the U.S. Dollar. The USD was down 10.7% in the first half of the year, juicing foreign market returns as earnings and dividends abroad were worth more in USD terms. This dollar weakness also contributed to a strong rally in precious metals prices, with gold and silver up approximately 25% and 24% respectively in the first half of the year.
Bonds have also done well this year due to the inverse relationship between prices and yields. With market yields lower as of the end of June compared to the end of 2024, bonds during this time as measured by the U.S. Aggregate index were up 4%.
Speaking of yields and interest rates, it is no secret that President Trump has been lobbying for the chairman of the Federal Reserve, Jerome Powell, to lower the Federal Funds rate. Lowering this rate tends to be stimulative to the economy and financial markets. President Trump is not the first President of the United States to attempt to pressure the Fed into lowering interest rates. The financial market expectations for rate cuts this year have been dialed back significantly as the Fed adopts a wait-and-see approach to gauge what impact tariffs will have on inflation. With inflation still running higher than desired by the Fed, they are in no rush to cut interest rates. And with euphoria having returned to the stock market with a resurgence in large technology stocks, valuations for the S&P 500 are again at a lofty level. Lowering the Fed Funds rate could have the opposite of the desired effect, resulting in higher inflation and pushing up, not down, longer term rates. We saw this happen late last year when the all-important yield on the 10-year Treasury bond – the key driver of mortgage rates – went up close to 1% during the time that the Fed was lowering the Fed Funds rate.
Arguably the most concerning cloud on the outlook for the financial markets is the large and rising levels of debt and deficits our country is running. One would have thought that our country would have locked in low borrowing costs when interest rates were incredibly low, not unlike what corporations were doing at that time by issuing long-term bonds with far-off maturities. Unfortunately, a huge percentage of our country’s debt is maturing this year, debt which will need to be refinanced at higher rates. As a result, our country’s interest expense has skyrocketed over the past few years. Thankfully, the financial markets have so far absorbed all of the new debt issuance without a spike in the yield demanded by investors to finance this debt. A sharp rise in yields would be unsettling to stocks and bonds alike. At current yields, I continue to favor shorter term bonds that would be less vulnerable to a rise in yields.
In the meantime, the FOMO trade (Fear of Missing Out) is leading investors to drive the S&P 500 to new highs. Bull markets can, and often do, run higher and longer than one might expect conditions to warrant. No complaints here.
I wish you an enjoyable summer and welcome any questions or concerns you may have.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged capitalization-weighted index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The S&P 600 Index is a capitalization weighted index comprised of 600 stocks viewed as having a relatively small market capitalization, chosen for market size, liquidity, and industry group representation. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Note that bond prices rise when yields fall, and vice versa, due to the inverse relationship between bond prices and yields. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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