July Perspective: Double Digits, Int'l Markets, Thirst for Clarity

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While we hope your family is enjoying the celebrations of summer, we type this this message in a somber mood, as our community in Austin and central Texas is contending with the harrowing floods of July 4. While we have clients all over the country, Austin is our home, and we extend our heartfelt sympathy to all affected. If you’re interested in supporting those impacted by the devastation, the organizations linked here are doing amazing work. The many messages we have received to check on our families is greatly appreciated! We are fortunate to have not been directly impacted, and remain focused on serving our clients.

Switching gears, let’s dig into the dismal (and everyone’s favorite) science of economics. Q2 was one for the books. The tug-of-war between soft data and hard data reflects the volatility of the environment. Soft data include sentiment and surveys, such as the ISM (Institute for Supply Management) manufacturing indices and consumer confidence. The soft data show pause and anxiety. The hard data include inflation, capital flows, earnings, unemployment, GDP (gross domestic product), etc. The hard data show resilience. GDP is slated to turn positive after record trade imbalances in the first quarter. Inflation remains below long run averages with unemployment at 4.3%. Earnings, while revised downward, as they typically are in Q1/Q2, project record earnings for the year. Meanwhile, foreign inflows are down significantly in the U.S., though increased in other western developed countries (more on this below).

Prediction and prognostication are perilous hobbies. We always say that using your crystal ball is a good way to end up walking on shards of glass, and this year is no different. Here are key considerations, as the new quarter commences:

Q2 was historically volatile, delivering both a bear market (-20%) and a bull market (+20%). International and Developed and Emerging Markets outpaced the U.S. by nearly 15%.

• Emerging Market Stocks (MSCI Emerging Index): +11.26% Q2, +15.57% YTD
• International Stocks (MSCI EAFE ): +10.95% Q2, 19.92% YTD
• U.S. Stocks (Russell 3000): +10.55% Q2, +5.75% YTD
• U.S. Small Cap Stocks (Russell 2000): +8.48% Q2, -1.78% YTD
• U.S. Bonds (Bloomberg Barclays Aggregate Index): +0.92% Q2, +4.02% YTD

The S&P 500® saw its third best day since 1957 on April 9th, and markets rebounded in a record 89 days. For perspective, it took 189 days for both the 2018 trade war and COVID bear markets to recover. If you miss these performance rebounds or historic market days, your plan will be set back. In times like these, sticking with your personal strategy is imperative. Volatility does not equate to a decrease—volatility can move in either direction.

The U.S. dollar weakened by over 10% on average to date. This is good for exports and internationally diversified investors. Let’s summarize international finance as succinctly as possible: it’s all relative. Weaker relative to another country’s currencies means they buy from the U.S. more cheaply. When they buy more, we can export more, and this is additive to GDP (previous point). Furthermore, our firm’s strategy of diversifying globally to varying degrees in portfolios allows you to benefit from a weakened U.S. dollar because those international investments return to U.S. investors at higher prices as well.

On again, off again tariff threats churn as inflation inched up to 2.67%. There has yet to be a significant impact on inflation measures due to tariffs, though the July reading showed an incremental increase across the board. Typically, there is a lag, but the Q1 surge in imports before any tariff announcements provided a meaningful runway for companies to seek clarity. The major impact thus far has been foreign capital flows and prolonged rate pause by the Fed. Foreign direct investment in the U.S. is down from $74 billion in Q4 to $58 billion in Q1. Though a negative data point in the U.S., global investors benefited, as previously stated.

The Federal Reserve Board of Governors voted unanimously to hold its rate steady at a target of 4.25-4.5% as inflation and employment remained steady in June. The Fed has a dual mandate—taming inflation while maintaining optimal employment levels. We’ve said ad nauseum since 2023: with inflation low and unemployment steady, dramatic rate changes should not be expected, especially with the potential for tariffs to boost inflation. The June employment number softened in the private sector, but not enough to outweigh inflation risk. Uncertainty is often worse than the actual decision, so let’s all root for quick clarity.

Q2 GDP is estimated at 2.6% as of July 14th, a reversal of the Q1 trend created by record trade imbalance. As discussed in our previous two economic updates, Q1 revealed a record trade imbalance as businesses rushed to import goods before tariffs increased domestic costs. Businesses essentially stockpiled two quarters’ worth of imports in the first quarter. Now, Q2 shows fewer imports as a result. Remember that the GDP equation ends with “net exports.” So, when imports are higher than exports, GDP is reduced, and vice versa. The collective import data from the first six months is more reliable.

Life and economics offer no guarantees—only a range of possible outcomes. Uncertainty and risk are a part of everyone’s journey, whether it’s caused by a natural disaster, geopolitical event, market event, or family tragedy. This is why what we do isn’t actually about the money! (Another one of our broken records) It’s about living your best life with the time we have. We encourage you to maximize your most valuable asset: TIME with the people you love, doing the things you love. It’s our privilege to be your partner in controlling the things we can, so that you are better prepared for the things we cannot.

Optimistically yours.

Sources: Ycharts, ATL Fednow, Fred.com, Dimensional.com, Reuters.com

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Index Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

Gross Domestic Product Price (GDP) measures changes in the prices of goods and services produced in the United States, including those exported to other countries. Prices of imports are excluded.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI EAFE: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States and Canada. The MSCI EAFE index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.