No Time for Fortune Telling
The second quarter of the year was a wild one for US equities – first falling over 10% in a week, then rallying over 20% before quarter’s end. Yet it was once again a time for diversifying assets to shine, as international equity performance benefited from a weak US dollar, and gold remained… well… shiny. With the economic outlook cloudy, and the tariff and inflation dynamics still weighing on the minds of the Fed officials, we stand poised to prepare for whatever may come.
The Fed bumped up future rate expectations
Inflation continues to be a focus for market-watchers and it remained rangebound between 2.5% and 3.0% (as it has for over a year). The Fed wants to see continued progress toward their target of 2% inflation to justify additional rate cuts, but it is not budging. In addition, the Fed knows that the pending tariffs, tightened immigration controls and tax relief in the recent spending bill, are all widely considered inflationary policies. This is factoring into the rate decisions.
Why does it matter? The Fed’s high Interest rates are putting a damper on economic activity. Lower rates could stimulate economic investment and potentially be a positive for US equities. The next few months could provide some clues as to whether the inflation pressures will actually begin to push prices higher or not.
Chart 1: Inflation is rangebound
Source: The US Federal Reserve, Bureau of Economic Analysis
Equities started poorly, but recovered… and then some
US equities fell sharply to start the quarter; down double-digits in the first week of April. This followed an already weak first quarter resulting in a peak-to-trough decline of the S&P 500 of almost 20%. The decline was indiscriminate, with both large and small stocks weak. But the S&P 500 rebounded around 25%, as US large cap stocks outperformed small cap.
The quick turnaround is a useful reminder of the dangers of market timing. An investor with cold feet during the March and April stock market declines, may have missed the subsequent 25% rally. Evidence shows, market-timing does not pay off over time. Our playbook during this volatility included nimble rebalancing (we call opportunistic rebalancing). Evidence shows this has the potential to capitalize on these fleeting moments, by looking every week for moments to systematically sell high and buy low.
Chart 2: US equities fall… then rally
Source: Factset, S&P 500, S&P Small Cap 600
International strength continues as the dollar weakens
Well-diversified portfolios benefited from international holdings in the first half of the year. In the first quarter, foreign stocks significantly outperformed their US peers even before considering the US dollar weakness. While US stocks were down around -4%, international stocks were up about 3% in local currency and 7% in US dollar terms.
In the second quarter, international outperformed again. Both the US and international were up over 10%, but international received a 7% benefit from the weak US dollar.
Avoiding too much US home-bias has been beneficial in 2025. US equity strength in previous years has likely made high home-bias commonplace amongst asset allocators. But those instituting evidence-based investors will likely have avoided this lure.
Chart 3: International got a boost from a weak dollar
Source: Factset, S&P 500 index, MSCI EAFE
US debt concerns contribute to rising Treasury yields
The government’s spending bill did not pass until after the close of the quarter, but its impact was felt in the debt markets far in advance. Yields in longer-dated Treasuries (30Y) increased from 4.6% to 4.9%, while shorter-dated instruments were less affected. Investors are demanding higher yields from Treasuries to compensate for the higher risk that the additional debt burden brings.
As yields rise, prices fall, so longer-duration Treasuries underperformed in the second quarter. For example, Vanguard’s Short-Term Treasury ETF (VGSH) produced a total return of 1.2% in Q2, while their Long-Term Treasury ETF (VGLT) fell -1.5%.
Some allocation to longer-dated Treasuries is still warranted in our opinion for yield and volatility (rebalancing opportunities).
Chart 4: The spending bill impacted long-term Treasuries
Source: Factset, 7Y and 30Y benchmark Treasury indices
Gold and International shine as the tariff narrative plays out
A weak dollar and tariff uncertainty provided a backdrop in the first half of the year for outperformance from gold and International equities.
- Gold continues to advance, up 26%, driven by its perception as both an inflation hedge and safe-haven.
- International stocks significantly outperformed domestic stocks, helped by better valuations and currency.
- US small-cap stocks fell on fears they will bear the brunt of the tariff headwinds and higher-for-longer interest rates.
- US bonds produced positive returns despite recent weakness in longer-duration securities.
Chart 5: H1 2025 Asset Class Roundup
Source: Factset
“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” – Peter Drucker
The second quarter was a not-so gentle reminder to investors to remain patient. As we put pen to paper on Perspectives three months ago, the US equity market appeared to be in trouble. The tariff announcement caught investors off guard, and stocks were falling. Fast-forward three months, and equities are hitting all-time highs again. Patient investors were rewarded. But that is now behind us, so how should investors be thinking about the third quarter?
A no fortune-telling zone
It is commonplace in our industry to take these moments to pontificate about what the next three months will hold for investors. It’s a fool’s game. It may be comforting to read that all’s well and all will be well for investors this quarter, but it is conjecture. The future is unknowable and I’d be wary of any investor who bases their decisions on fortune-telling. As evidence-based investors, we will never do that. For us, preparation is far more important than prediction.
That is not to say we don’t think about the future. We think about it plenty. We consider the possible and take steps to be prepared for those possibilities (as well as some we may not have thought of). So, what does preparation look like? Here are a few examples:
- Diversification (international, bonds, gold, emerging, etc.).
- Tilting exposure to areas of the market that have historically performed well in times like these (e.g. factors like momentum as well as uncertainty hedges like gold).
- Avoiding unproven assets and those that have greater potential to suffer permanent loss of value (e.g. cryptocurrencies and perhaps private credit?).
- Avoid high-cost private equity investments with questionable return benefits and limited liquidity (Harvard and Yale’s castaways are headed for retail investors).
- Sophisticated trading systems and logic that can systematically sell high and buy low when the opportunities arise (i.e. take advantage of big market moves).
For us, good investing is about stringing together a series of small, evidence-based decisions, each designed to tip the scales in favor of our client’s portfolios. That is how we deal with the uncertainty of tariffs. That is how we deal with the uncertainty of inflation. Instead of trying to predict the unpredictable, we focus on what we can control, to help prepare for whatever comes our way. It’s not meant to be flashy. It’s meant to be good investing.
Thank you again to our clients, friends and family who have joined our Strategic community and place their trust in us. We look forward to opportunities to collaborate and elevate in the coming quarter.
About Strategic
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2.5 billion.
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