Second Quarter 2025

Tariffs and Markets

At the very beginning of my First Quarter Newsletter, I noted that the talk of tariffs was making the markets more volatile. While U.S. stock markets had been up until mid-February, the introduction of tariffs began to take a toll. In a 4-day slide, from April 3^rd through April 8^th, the S&P500 dropped more than 12%. At the close of business on April 8^th, the S&P 500 was down almost 19% and within about 1% of being a bear market.

Fortunately, the President backed off his initial tariff plans, to give countries an opportunity to negotiate their individual tariffs. The U.S. markets responded positively and by the end of the quarter the S&P 500 was up 5.5% year to date.

Diversification Matters

For some investors the answer to the fall in equity prices by April 8^th was to sell their positions. Thereby locking in losses. The key to a long-term investment strategy is to be diversified! A well diversified portfolio was not ruptured on April 8^th. Bonds did what they were supposed to do, international stocks outperformed U.S. stocks and large value stocks out preformed large growth stocks.

A Look at the Numbers

The Dow Jones Industrial Average was down 1.3% at the end of March and up 3.6% at the end of June. In a similar manner, the S&P500, which was down 4.6% at the end of March, was up 5.5% at the end of June. The Mid-Cap 400 went from -6.5 to -0.6, while the SmallCap 600 went from -9.3% to -5.3%. There was a real winner with the MSCI ACW ex-USA (international index) going from a positive 4.6% at the end of March and growing to 16% by the end of June. The 10- year U. S. Treasury grew from 4.25% to 4.23%, and the Aggregate Bloomberg average went from 4.88% to 5.30%.

A Change in Strategy

While the rebound for U.S. stocks was good during the quarter, we are still dealing with the issue of tariffs. The President has now set a deadline for countries to negotiate their tariffs, with a deadline of August 1^st. This decision has once again been met with angst by investors and volatility will be the result. In looking at the likely implications of tariffs and looking at the result for the year to date of both mid-cap and small-cap stocks, we decided during the quarter to eliminate, for now, both mid-cap and small-cap positions from our portfolios. We also took this opportunity to redirect these funds into international stocks.

International stocks appear to be better valued currently, than U.S. stocks. In

addition, because of the tariff situation the dollar has lost considerable value, ending the first half of this year down 10.7%. What this means is that foreign currencies are gaining in value and thereby lifting the value of their stocks. It also means that foreign exports are pricier, and U.S. exports are cheaper. All this, along with the tariffs, should begin to play out in earnest during the third quarter of this year.

The State of the Economy

From the middle of July through the middle of August we will begin to see the impact of tariffs and U.S. Government policies. It is clear that when the President extended the deadline for negotiations on tariffs, very few countries fell in line. In early April the President indicated that one of the first “deals” would be with Japan. Thus far no deal has been agreed to. This lack of progress goes for most of the counties with whom we do a great deal of trading. These negotiations are complicated, and most of the countries are used to having open access to U.S. markets. A fundamental change is coming, and we don’t really know what it is going to bring.

The Big Beautiful Bill

My mother used to tell me that beauty is in the eye of the beholder. The bill that was passed by the House, Senate and signed into law by the President is sweeping in so many ways. It does memorialize the tax cuts that were done during the first Trump administration. Unfortunately, we as a nation need to begin paying our bills, not racking up increasing deficits. We need to have more taxes to cover social issues that are closing in on us. While Congress was working on this bill, the Trustees of the Social Security system announced on June 19^th that the plan will be insolvent one year earlier than they thought it would be last year. The insolvency date is now the year 2034. This Congress and past Congresses have known this was coming and have done nothing about the situation. Just with this one looming event, you’d think there would be some sanity in addressing a better tax base. Add to this, Congress has cut Medicaid, which is used by the least fortunate of our population. This was done to pay for added tax cuts. We, as a nation, are kicking the can down the road on so many issues that our children, grandchildren and great grandchildren will have to address.

Where do we go from here?

This is the strange part of our current situation. At the end of June unemployment fell from 4.2% to 4.1%, job creation increased by 147,000 and inflation seems to be under control. Large corporations are still making lots of money. Marty Zweig, a legendary stock market investor, is well known for his strong belief in following market trends and avoiding trying to "fight the tape". He emphasized the importance of being in harmony with the market and believed that fighting trends was "suicidal" because they have a higher probability of continuing than not. Looking forward to a great third quarter!

Ed Mallon