Summer 2025 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
Don’t “Sell in May”
The old Wall Street adage, “Sell in May and go away” reflects a historical trend for markets to remain flat during the summer months. This year is a clear exception, as markets rallied sharply but only after wading through volatility early in the quarter. Specifically, Trump’s “Liberation Day” announcement of 150% global tariffs on April 3rd resulted in a decline in the S&P 500 of 12% in four days. Trump’s subsequent announcement, “This is a great time to buy [stocks],” was immediately followed by a 90 day pause on the Tariffs resulting in a 10% stock market gain in a single day. The quarter included more news on tariffs, Israel’s 12-day war with Iran ending with the U.S. bombing Iranian nuclear sites, and a Fed meeting with no changes to interest rates. Yet through all the chaos, markets found their footing.
The S&P 500 gained 11% during the quarter, mostly in May and June, while international and emerging markets also rose by the same amount. However, this masks the year-to-date jump in international and emerging markets stocks, which are up 20% and 16% respectively compared to the S&P 500’s 6% year-to-date gain. Part of the gains are due to a declining U.S. dollar which has slipped by 7% on a trade-weighted basis this year. In an environment initially expected to be stagflationary, bonds have held up well this year. The aggregate bond index has gained 4%, including a 1.2% rise in the second quarter. This exceeds our expectations for bonds to earn their coupon or better this year as interest rates have declined modestly. The 10-year treasury rate started the year at 4.6% and has declined to 4.26%, providing a boost to intermediate bonds.
The top three macroeconomic threats facing markets this year have been tariffs, inflation, and unemployment. Clearly, markets have looked through the tariff uncertainty and expect trade deals to be made over time. However, few deals have been penned during the 90-day pause, and the White House has recently indicated the pause may be extended beyond July 9th. Businesses have bought inventory aggressively to make purchases at pre-tariff rates. This was reflected in first quarter GDP where imports significantly exceeded exports driving down GDP, however, domestic growth remained robust. Inventory builds have also resulted in surprisingly stable pricing as the impact of potential tariffs have been pushed out in time.
Inflation as measured by the Consumer Price Index has moderated to 2.3% from 3% at the beginning of the year. Inflation is hovering near the Fed’s target of 2%. Employment has remained strong, with an unemployment rate of 4.2%. While this is a slight increase from the mid-3% lows of 2022, it remains reasonable and has been stable for the past year. Given price and employment stability, strong markets, ongoing tariff negotiations, and a growing economy, the Fed likely remains on hold for further rate reductions.
This year has highlighted the benefits of maintaining a diversified portfolio, which continues to be one of the most effective ways to manage investments as different markets exchange performance attributes over time. In addition, one of the most prescient takeaways from the quarter is the extraordinary risk of trying to time the market. Selling on “liberation day” and missing the 10% market rebound on the “good day to buy stocks” would have left portfolios of market timers severely lagging more patient investors.
In this period of market volatility, we remain focused on the things we can control, including our investment processes. For example, we are not market timers, but should your portfolio drift by more than 5%, we will conduct further analysis and determine whether prompt action to rebalance is necessary to realign with your strategic objectives. This process is designed to control risk – buying when markets are down and selling as they rise over time. We also have processes in place to respond to large market movements up or down, and our Investment Committee regularly reviews our portfolio holdings, performance, and benchmarks to ensure we are meeting our own expectations. In short, we continue to rely on our disciplined investment processes to provide tax-efficient, globally diversified portfolios that tend to suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
Sources: YCharts, St. Louis Fed, WhiteHouse.gov, Associated Press
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Different types of investments involve varying degrees of risk. Past performance and detailed processes do not guarantee future results. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives. Asset allocation, rebalancing, and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses.
