Q2 2025
Dear Client,
We hope you all had a pleasant and peaceful long weekend! Here in the mountains, it was almost perfect weather, and we made the most of our time hiking, biking, parades, pool time, and grilling. With the year halfway done, it is a great opportunity to check in on your finances and any big changes contemplated or upcoming. Please reach out and we’ll schedule a time to catch up on any of the above.
Looking back at our Q1 letter, written in the immediate aftermath of the tariff announcement, it is nice to see that the situation has thus far proceeded much as we expected. The administration saw that the haphazard levels and implementation of tariffs was spooking the world markets and offered a respite to give time to negotiate deals. To be sure, the strength and speed of the rebound in the markets was more than we anticipated, but the scenario and results we expected did play out. After a two-month delay, we are now in a position with significant uncertainty once again on the tariff horizon. We are not blind to the pattern of the current administration. They prefer to create an uncertain situation so that they can bring certainty and claim victory. That said, it is the “unknown unknowns” about which we must always be concerned.
The index returns for the quarter (Q2) and the first half of the year (H1) are as follows (calculated from www.stockcharts.com):
S&P 500 change: 10.85% Q2, 5.11% H1
S&P 500 Equal Weight Index: 4.96% Q2, 3.83% H1
Nasdaq Composite change: 18.28% Q2, 4.98% H1
Nasdaq Composite Equal Weight Index: 13.05% Q2, 8.54% H1
Dow Jones Industrial Average change: 5.29% Q2, 3.36% H1
Ten Year Treasury Yield change: 1.71% Q2, -6.44% H1
Crude Oil (WTI Front Month Contract) change: -8.62% Q2, -8.81% H1
Gold (GLD ETF) change: 5.65% Q2, 24.83% H1
The snapback from the April lows has been quite strong, although when combined with the preceding weakness the indices are up modestly for the year. The most remarkable number to us this quarter though, is the weakness in oil. The idea that the US directly attacked Iran, and the price of oil is lower, is astounding. Interest rates didn’t move much during the quarter, as The Federal Reserve board continues to hold rates steady, trying to not to cut rates into potentially increasing inflation.
The justification for the current strength in the markets and possible catalysts for it to continue were somewhat difficult for us to see and understand as we ended the second quarter. The narrative emerging as we move forward has two major and one minor element:
Artificial Intelligence will boost productivity and efficiency to a degree on par with electricity, automobiles, and the internet. So, all assumptions of stocks looking expensive are invalid, as they will experience a tremendous boost to margins.
The growth created by the tax cuts and spending in the new bill will spur growth and prosperity that will outpace the increased costs. Effectively, the nation is going to fix the Debt/GDP equation by growing Gross Domestic Product rather than shrinking Debt.
a. Federal Reserve Board Chairman Powell is resolute in not cutting interest rates any further until he is certain inflation will not be reignited by tariffs. However, there is very little doubt in the markets that a cutting cycle will begin at the latest in May of 2026 with the appointment of a new Federal Reserve Board Chairman.
Although all the long-term issues remain, and are probably worse now, the market has chosen to focus on the near-term benefits and look for possible catalysts for now. The new bill does not in any way match the themes of government efficiency or living/spending within our means as a nation. However, it does offer immediate benefit to most of us (those of us reading/writing this note), and the costs are kicked down the road another few years.
Amidst all of these cross currents, we have continued to try to manage your accounts appropriately for each of your specific situations. Broadly speaking, we want to maintain a cash cushion based on your needs, we want to grow your assets over time, and we want to accomplish an asset mix and volatility profile commensurate with your sleep quotient (i.e. fear of fluctuations should not keep you up at night). For some that meant significant trading during the first part of this year, and for some that meant carefully trimming and adding around the edges.
All in all, we are pleased with the market resilience thus far but are wary of further volatility shocks. Just since we began this note, the tariff deadline has been extended, a new political party is in the works, and copper has been added to a 50% tariff list…never a dull moment.
We hope you all will enjoy the rest of the summer!
Take care, Bo and Lesley
