A Strong Quarter After a Tariff Scare
Markets rebounded impressively following a sharp selloff in April triggered by a surprise tariff announcement. By quarter-end, returns across all major equity categories were solidly positive:
U.S. Large Cap: +10.87%
U.S. Small Cap: +7.22%
International Developed: +12.16%
Emerging Markets: +9.28%
On the bond side, most sectors delivered positive returns, with the exception of long-duration Treasury bonds, which declined due to upward pressure on yields.
Short-Term Inflation-Protected: +0.94%
Intermediate-Term Corporate: +2.21%
International Bonds (Intermediate): +2.07%
Long-Term Treasury: –1.51%
A Soft Landing After Flying High?
The economy continued to show modest growth, supported by solid consumer spending. However, signs of strain are emerging in lower-income households. Inflation continues to moderate but remains above the Federal Reserve’s 2% target.
After a strong economic expansion, the usual debate emerges: hard landing or soft landing? A hard landing would involve a recession with job losses and reduced spending, while a soft landing suggests slowing growth without a full downturn. Most economists still lean toward the soft landing scenario.
Interest Rate Policy: Patience from the Fed
The Federal Open Market Committee (FOMC)—which makes interest rate decisions by majority vote—held rates steady this past quarter. The most recent decision was unanimous (12–0), signaling consensus that it’s too soon to cut.
Is the Fed being too cautious? It’s hard to say. The data is mixed: some indicators show resilience (supporting steady rates), while others show weakness (suggesting cuts may be warranted). The biggest risk of cutting too soon is reigniting inflation.
Our outlook: One or two 0.25% rate cuts remain likely later this year, assuming inflation continues to moderate.
Are Stocks Too Expensive Again?
After a strong run over the past two and a half years, valuations are beginning to look stretched. Morningstar’s aggregate fair value estimate suggests stocks are about 2% overvalued. Meanwhile, Warren Buffett’s favored metric—the market cap to GDP ratio—currently sits above 200%, which historically implies a highly valued market.
What does this mean? It doesn’t tell us when a correction will happen—only that we should expect bumps ahead. Research is very clear: those who try to time market declines often underperform those who stay the course. The best strategy isn’t timing the downturn—it's being prepared to take advantage of it by buying when prices fall.
Final Thoughts
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Wishing you and your family a joyful and safe Fourth of July!