Market Updates

Source: Moore Financial Advisors & Morningstar

-RK

Wednesday, July 2 marks the halfway point for the calendar year of 2025 – 182 days behind us, with 1 Wednesday, July 2 marks the halfway point for the calendar year of 2025 – 182 days behind us, with 182 days remaining.

And summer has kicked off in the northeast with an intense heat wave. After a cool late winter and early spring, stocks, too, are sizzling once again.

The chart below shows the path thus far in 2025 of the S&P 500 Index of large company US stocks.

Source: Wall Street Journal

The release of the made-in-China, low-cost artificial intelligence (AI) model DeepSeek caused US technology stocks to wobble in late winter.

Then, the imposition of draconian tariffs by President Trump in early spring precipitated a stock market plunge of nearly 20% from the recent peak in February.

But a pause in the most severe tariffs allowed for a stock market rebound. As of Monday, June 30, stocks reached a new all-time high.

Top of mind for many investors: can the stock market good times continue to roll?

In the absence of further trade / tariff setbacks, the answer is: probably yes.

The near-term path now seems to favor stocks moving higher amid ongoing economic growth; greater certainty on taxes; contained inflation; the anticipation of falling interest rates by the fall; and a consumer that continues to spend.

For the intermediate term, the precise price path that any asset will follow is impossible to discern. The chart above could be Exhibit 1 supporting this statement.

But for long-term investors who map out a plan and stick to it, the odds of realizing a satisfactory return are quite good.

For example, JP Morgan Investment Management’s Guide to the Markets shows that, for a balanced portfolio of stocks and bonds (60% stocks / 40% bonds, rebalanced annually) returns for each and every 10-year period since 1950 have been positive.

For the month of June, US stocks were up 5.1%, foreign stocks rose by 2.4%, and US bonds returned 1.4%.

Year-to-date, foreign stocks were the biggest winner, up by 20%. A weaker US dollar has contributed to the stellar returns for US investors in foreign stocks. Also year-to-date, US stocks have climbed by 6% and bonds have returned 4%.

For a slightly longer historical perspective, the chart below shows returns by quarter for the past 12-month period for US stocks and bonds.

Source: Moore Financial Advisors & Morningstar

-RK

In Wayne’s World, the early 1990s cult-classic movie, protagonist Wayne and his sidekick Garth play street hockey on the neighborhood thruway. Automobiles pass frequently. Wayne and Garth don’t mind.

Street hockey provides an interesting model for thinking about financial markets. The cadence of shoot-score / shoot-miss / pause / move net off the street-move net back onto the street / restart is all part of the contest.

At times there are scores (when the market goes up). Other times, there are misses (when the market goes down). And, once in a while, external factors alter the field (for example, new and confusing government policy changes).

But the game continues under all conditions and players have an easier time if they take the changes in stride and continue to move forward.

Drawing the analogy to today’s situation, we’ve just passed through a miss / pause / net off the street phase. The net is now back in the road and the play has restarted.

And what of all the concerns about tariffs?

Some of us remain gravely concerned about tariffs, and also about unconventional (and even radical) policy approaches.

But many investors seem to think that Trump learned a lesson back in April, when the rout in stocks, bonds, and the US dollar forced a suspension of much of the global tariff rollout.

The financial market consensus reached in early May was that the final tariff plan is likely to be far more modest than the initial plan revealed on “Liberation Day” in early April, which has cleared the way for a sizable stock market rally.

Also, earnings reported by large US companies for the first quarter of 2025 were generally better than feared, and recently released economic data has exceeded expectations.

Gloom was pervasive in April, but lifted a bit in May as results haven’t been so bad.

A corollary to earnings is the confidence evidenced by company managers through their willingness to continue to spend money on current projects, and plan for new projects that will support and grow their businesses.

According to information compiled by Bloomberg, most of the largest publicly-traded companies (71%) that provided guidance after Trump’s early April bombshell have decided to maintain their capital expenditure outlook.

About 8.5% of firms have increased their spending plans, while 18% have revised them lower; 3% have withdrawn guidance. These results show that business confidence largely remains intact.

Some moderation (or at least temporary reprieve) in the tariff regime, as well as business profitability holding up and business spending plans remaining mostly intact, paved the way for “Game On” in the financial markets.

The old saying “sell in May and go away” was a dud in 2025, because last month was the best performing May in a quarter century.

The chart below shows monthly stock market performance for each May going back to 1990.

Source: Bloomberg

A second old saying, “markets climb a wall of worry” is holding true for 2025. Uncertainty has been outsized, but nonetheless, most asset classes at home and abroad have now registered positive returns.

Here’s how the performance of various asset classes stacked for the month of May and thus far in 2025:

Source: Moore Financial Advisors & Morningstar

-RK

For drivers, a car U-turning on busy roadway is universally viewed as negative. For investors, the recent policy U-turn by the Trump administration on its busy tariff agenda was universally viewed as positive.

As the tariff announcements came fast and furious in early April, the financial markets took another leg down.

During four trading days early in the month (April 3^rd – 8^th) US large company stocks dropped by 12%.

This downdraft, on top declines registered in the first quarter, brought the cumulative drop in stocks close to a bear market – down 19% from the most recent high on February 19.

Then, President Trump said he’d pause tariffs on dozens of countries for 90 days after coming under intense pressure from business leaders and investors to reverse course.

On April 9, the stock market delivered a 1-day rally of 9% following that announcement.

As of the end of April, here’s how the situation stood with regard to tariffs:

• A 90-day pause on so-called “reciprocal” tariffs (apart from a 10% universal tariff)
• Further tariff exceptions for computers, smartphones and electrical equipment
• Some short-term exclusions from the 25% tariffs on imported vehicles and auto parts under consideration
• Conversely, the Administration has ratchetted up tariffs on China to 145%
• New levies on imported pharmaceuticals, lumber and semiconductors are expected in coming months

Beijing’s countermove was to raise tariffs on all US goods imported into China to 125%.

Financial market participants are now interpreting the situation as less of a global trade war, and more of a tariff showdown between the US and China.

This “less bad” news was enough to allow the stock market to turn back up during the second half of April.

When all was said and done (or, perhaps more aptly put, after all that was said), here’s how things shook out in the financial markets for the full month of April:

Note: Foreign Stocks = MSCI EAFE Index; Tech Stocks = Russel 1000 Technology Index; Bonds = Bloomberg US Aggregate Bond Index; US Large Co = S&P 500 Index; US Small Co = Russell 2000 Index

Year-to-date through April 30, here are returns for the above asset classes:

•  Foreign stocks, +12%
• Tech stocks, -10.4%
• Bonds, +3.2%
• US Large Co, -5.1%
• US Small Co, -11.6%

Positive momentum pushed the stock market up further during the first two days in May.

By the close of trading on Friday, May 2, the S&P 500 index of large company US stocks had rallied for nine straight trading sessions and had reclaimed all losses registered in April.

The quick recovery from April’s intense bout of crisis-like volatility indicates that investors seem believe the American economy isn’t about to slide into recession, and that it will take a much bigger shock to push stocks into a bear market.

-RK

Given the developments that have occurred in early April – implementation of draconian trade policy and a sharp drop in stocks – the first quarter of 2025 already seems like ancient history.

The three main developments during the January – March 2025 period were:

Stocks reached new all-time highs in mid-February, but didn’t stay at those lofty levels for long as tariff concerns set in

1. Foreign stock returns exceeded US stock returns by the widest margin in some time, helped by a weakening US dollar
2. Bonds provided ballast for portfolios by delivering positive returns

Here’s a snapshot of quarterly stock and bond performance for the last four quarters:

Note: US Large Co = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Our January Market Update highlighted “beneath the surface” turbulence in the financial markets. In February, that turbulence emerged, pushing stock prices lower – and pressure accelerated into early March.

The US stock market hit a new all-time high on February 19. But the mood in the US financial markets, which had been generally positive since election day, shifted due to investors’ nervousness driven by:

1. The lofty prices of big tech stocks
2. The possibility of slower economic growth
3. Repercussions related to trade policy and tariffs

Since mid-February, technology shares have been leading the way lower for US stocks. From the February peak to the close of trading on March 10, the Nasdaq 100 technology-focused stock index declined by 12.9%.

Declines in the broader stock market have been less pronounced. The S&P 500 Index of large company stocks has declined by 8.6% from the mid-February peak.

Interestingly, foreign-company stocks have held up relatively well, with the benchmark MSCI EAFE Index of 21 developed countries (excluding the US and Canada) rising by about 1% since February 19.

The repercussions related to trade policy and tariffs are unclear at this point because the policies themselves are unclear, with the administration taking an on-again, off-again approach to both policy formulation and implementation.

However, consumers’ concerns amped up in February. Worries about the future direction of the US economy were displayed in two monthly surveys:

The University of Michigan’s Index of Consumer Sentiment for February declined sharply from the January reading, and inflation expectations took a big step up from January. This monthly survey polls at least 500 individuals each month from across the US.

A separate survey of consumers, conducted by The Conference Board (which interviews approximately 300 consumers each month) showed similar results: a steep decline in consumer confidence, marking the third straight decline, and an increase in inflation expectations.

Below is a chart showing the Consumer Confidence Index, published on The Conference Board’s website. The blue line shows the history of the Consumer Confidence Index. The grey bars indicate periods of economic recession.

According to The Conference Board, a reading below 80 generally indicates a potential recession is ahead, based on consumers’ short-term outlook for income, business, and labor market conditions. Currently, the data is healthy distance from signaling recession.

A senior economist of global indicators at The Conference Board had this to say about February’s survey: “References to inflation and prices in general continue to rank high in write-in responses. Most notably, comments on the current administration and its policies dominated the responses.”

Without clarity on policies that will affect jobs and the cost of goods and services, consumer concern likely will stay high, and consumer activity may downshift.

Because consumers make up the largest component of the US economy – consumer spending accounts for roughly two-thirds of Gross Domestic Product, or GDP – financial market participants smell trouble, which has pressured stocks.

For the month of February, large-company foreign stocks (MSCI EAFE Index) came out on top and gained 3.1%. US investment-grade bond returns (Bloomberg Aggregate Bond Index) also were appealing, with a gain of 2.2%.

Large-company US stock returns, measured by the S&P 500 Index, declined by 1% in February. Technology shares, measured by the Nasdaq 100 Index fell by 2.7%, and Small-Company US Stocks fell by 4.8% (CRSP US Small-Cap Index).

Here’s a snapshot of February market performance (note that returns from the first week of March are excluded from the chart below):

Note: Foreign Stocks: MSCI EAFE International Index; US Small Co: CRSP US Small Cap Index; US Large Co = S&P 500 Index; US Tech Stocks: Nasdaq 100 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Stock and bond market performance for the first month of 2025 was pleasing.

Foreign stocks gained 4.8%, US small company stocks climbed 3.9%, US large company stocks went up 2.7%, and technology shares rose by 2.1%. Bonds were in the black, too: high-quality, intermediate-term debt returned 0.5%.

However, there was turbulence beneath the surface of the stock market, mainly due to developments in the technology sector.

One part of the Artificial Intelligence environment is Large Language Models (LLMs). These AI-powered systems are trained on massive amounts of text data, which facilitate human-like text responses to a wide range of prompts and questions.

ChatGPT is a widely recognized and utilized LLM. It was developed by OpenAI, of which Microsoft holds a minority ownership stake.

All the big tech companies, including Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft and Tesla are spending huge amounts of money investing in LLMs and anticipating big future payoffs on this invested capital.

In addition to these well-recognized firms, a constellation of lesser-known US companies (big and small) that supply software, equipment, storage, and energy to support AI initiatives have been riding the AI wave higher.

In mid-January, a new chatbot called DeepSeek caught the attention of tech investors for several reasons: it was developed cheaply; it runs on less-expensive equipment; it is fast; and it is good. Also, its maker is a small Chinese company, not a Silicon Valley behemoth.

Whether or not DeepSeek becomes a true competitive threat to US technology companies is yet to be seen.

But it was a shot fired across the bow of US technology companies, and some US tech stocks swooned for a few days at the end of the month.

Why does this matter for US investors? The main reason is that the US stock market has become more dependent on ever-higher profits, and ever-higher stock prices, from big tech.

The information technology sector has grown from about a quarter of the US stock market a few years ago to more than one-third today.

When the future profitability of US tech companies is called into question, and when tech stocks slip, it’s harder now for stocks in other sectors to pick up the slack.

This also means that even US investors who hold well-diversified portfolios are likely to feel pain if a correction in tech stocks materializes.

In January, tech turbulence was contained to a few days, and stocks generally finished higher at the end of the month.

However, the DeepSeek tremor was a reminder that troubles for technology companies, if sustained, would probably have far reaching effects for all investors.

Regarding the safer side of investing, the “big news” in the bond market for January was: no news.

The Federal Reserve held their first FOMC meeting of 2025, where interest rate policy is reviewed and discussed, and… nothing happened.

Market participants are now expecting the Fed to stand pat for a while, and to keep the target for short-term interest rates steady for the next six months. This contrasts with the “rate cuts” that occurred during the second half of 2024.

Why is no news from the Fed big news?

It likely means savers will continue to enjoy a satisfactory rate of return on their guaranteed money that is kept in high-yield bank savings accounts and bank CDs.

With the lower bound of the Fed Funds target rate at 4.25%, this probably means short-term CDs are likely to provide a 4%+ annual percentage yield (APR) during the first half of 2025.

It also means that the Fed remains vigilant in their fight against inflation.

If the Fed is successful in convincing market participants that inflation is indeed under control, it should translate to a hospitable environment for investors who own intermediate- and longer-term bonds.

With 10-Year Treasuries yielding about 4.5%, it’s reasonable to expect 5%-plus returns for 2025 from bond allocations in investment portfolios, if inflation, and inflation expectations, remain contained in 2025.

But a trade war could be problematic for financial markets.

An emerging risk, especially to the bond market, is a new tariff regime. On February 1, President Trump announced new tariffs on a range of goods coming into the US from Canada, Mexico, and China.

Trade is huge, diverse, and complex, so the ultimate impact of higher duties isn’t easy to know. A lot depends on size, width, and length: how high tariffs go, how broadly they’re applied, and how long they last.

If tariffs come and go quickly, the inflationary impact will be minimal. But a new regime with high tariffs applied to many trade partners that lasts for an extended period could usher in higher inflation.

If expectations about future inflation go up substantially, this will likely mean higher bond yields, with lower prices and lower returns for bonds – especially for intermediate and longer-term bonds and bond funds.

And if history does rhyme (to paraphrase Mark Twain) then resurgent inflation may well prove to be a challenge for stocks, too.

Performance for the month of January is pictured below:

Note: Foreign Stocks: MSCI EAFE International Index; US Small Co: CRSP US Small Cap Index; US Large Co = S&P 500 Index; US Tech Stocks: Nasdaq 100 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

In most instances, from Christmas through year end, investors are treated to a “Santa Claus rally”, where stock prices rise. But 2024 had an atypical end, with stocks falling flat.

The closing drop last year marks only the 12th time the benchmark S&P 500 index fell by more than 1% over that span since 1952.

So, does a “Santa Slump” mean poor returns going forward? Not quite, according to Bespoke Investment Group.

The research outfit found that, in the twelve months following a year-end decline of more than 1%, stocks tended to do better.

In fact, Bespoke found that large company stocks’ median performance after those eleven down years has seen a roughly 12% gain.

For 2024 as a whole, it was another banner performance for U.S. stocks.

In 2024, the S&P 500 index of large-company stocks rose nearly 25% and hit 57 new all-time highs along the way – the most since 1928. This stellar performance follows a 26% return for US stocks in 2023.

Once again, we have the technology sector, and the excitement around Artificial Intelligence (AI) to thank for these more-than-satisfactory gains. The seven largest tech companies, often referred to as the “Magnificent 7”, rallied 48% in 2024.

Stock gains were slightly less concentrated last year. The “Mag 7” contributed 55% of the return of large-company stocks, compared to 63% in 2023.

Outside of the US, stock returns were positive, but much less impressive. The MSCI EAFE (Europe, Australasia, and the Far East) index of foreign stocks rose by a pedestrian 3.5%.

One reason why foreign stock returns trailed far behind US stocks is that the US dollar strengthened by about 7% compared to other major foreign currencies.

Dollar strength acts as a drag on foreign stock returns, when those returns are measured in US dollars.

Another reason is that the Mag 7 is unique to the US.

While successful technology firms do exist outside US borders, no other country or region has an equivalent group of dominant, AI-focused companies like Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla.

Bond returns also lagged far behind those of US stocks. Through September, intermediate bonds registered pretty good performance, returning about 5%.

But as the odds of a Republican victory at the polls went up in the fall, so too did interest rates (the concern being resurgent inflation), which had a negative effect on bond prices.

By the end of 2024, intermediate-term bonds, measured by the benchmark Bloomberg US Aggregate Bond index, returned 1.3%.

Short-term bond funds, where prices are much less influenced by changes in interest rates, did better, posting returns ranging from 4 – 5%.

Here’s a snapshot of quarterly US stock and bond performance in 2024:

Note: US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Few were nonplussed by the outcome of the Federal Reserve’s meeting on November 7: a 0.25% cut in short-term interest rates.

The Fed has been consistently telegraphing a message that it believes there is room for further interest rate reductions.

The top of the target range for the Federal Funds rate, which influences how other short-term interest rates are set, is now 4.75%, down from a recent peak of 5.5%.

Somewhat surprising was how Americans voted in the November 5 presidential election.

Opinion polls had been forecasting a statistical dead heat, but the margin of victory in the popular vote was wider than expected: 1.6 percentage points, or about 2.5 million votes, in favor of Donald Trump.

More surprising was the gap in electoral votes (312 to 226), and that both houses of Congress will be under Republican control in January.

The biggest surprise for investors in November, though, was the extent to which the US stock market rallied.

The S&P 500 and the Dow Jones Industrial Average indices delivered their biggest monthly percentage gains of 2024 in November.

Stocks have pushed higher on expectations that proposed tax cuts and deregulation will further boost corporate profits.

And stocks have largely ignored the potential risks, such as higher inflation, that may weigh on the financial markets if pledges to impose tariffs on US trading partners come to pass.

For the month of November, US large company stocks gained 6% and US small company stocks did better still, registering an increase of 10.5%.

US investment-grade bonds returned 1.1%. Foreign stocks, where returns are measured in US dollars for US investors, struggled as the US dollar moved higher, and declined by 0.3%.

Year-to-date, US large company stocks have gained nearly 28%. US small company stocks are up by 23%. Foreign stocks have risen by about 6.5%, and US investment-grade bonds have returned 3%.

Here’s a snapshot of stock and bond performance for November:

US Small Co Stocks: CRSP US Small Cap Index; US Large Co Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index; Foreign Stocks = MSCI EAFE Index

-RK

With the approach of the US Presidential election, some investors had been fearing a “Shocktober” for financial markets, however, October proved to be more like “Floptober”.

Stock markets were generally in the black for the month, but on Halloween equity indices flopped to red. For the month as a whole US large company stocks declined by 0.9% and small company stocks fell by 0.7%.

Quarterly earnings reports released by a few large US technology companies last week underwhelmed Wall Street analysts. Concerns about the possibility of diminished tech profits in the future spooked stocks and seemed to be one of the factors behind the fall in stock prices.

Foreign stocks were negatively impacted by a strengthening US dollar and dropped by 5.3% in October.

Despite recent weakness, though, stocks have performed very well so far this year. With two months to go in 2024, US large company stocks have returned nearly 21%, small company stocks have risen 11.5%, and foreign stocks are up by 7%.

The past month delivered more tricks than treats for bond investors, too. Intermediate- and long-term interest rates rose by about a half percentage point which translated to negative performance for bond fund investors.

The bond market situation can be confusing for some investors, especially when longer-term interest rates go up at a time when the Federal Reserve has begun to reduce its target for short-term interest rates.

Concerns about persistently wide Federal budget deficits and increasing US government debt, and the possibility of both conditions worsening under either future Republican or Democrat administrations, were factors behind rising intermediate and long-term interest rates, and poor bond performance, in October.

The performance picture is murkier for bonds going forward. Satisfactory returns from short-term bonds seem likely, because interest rate fluctuations have a lesser impact on bonds maturing on the sooner side (and bond funds which hold these securities).

However, for bonds maturing farther out in time (and bond funds that hold these securities), rising interest rates are a drag on near-term performance.

The benchmark intermediate-term US bond index fell by 2.5% in October. Year-to-date, intermediate-term bonds have registered a positive return of 1.5%.

For short-term bonds, Morningstar’s bond benchmark that tracks performance for US bonds with less than a year to maturity had a positive 0.25% return in October, and is up by nearly 5% year-to-date.

Despite softer financial markets in October, new data related to the US economy remained upbeat.

Gross Domestic Product (GDP), which quantifies the total value of all goods and services produced within a country’s borders, and therefore acts as a kind of quarterly economic “check-up”, continues to show that the US economy is in good health.

The Commerce Department reported last week that GDP rose by a 2.8% annual rate in three months ending September 30, after adjusting for inflation. That came close to the 3% growth rate in the second quarter.

While output in some areas, such as the housing market, has been lackluster, overall the US economy remains buoyant, supported by wages that continue to rise and consumers whom are willing to spend.

Here’s a snapshot of stock and bond performance for October:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index; Foreign Stocks = MSCI EAFE Index

-RK