By: Paul Morrone
Three months ago, not in my wildest dreams would I think I’d be sitting here today writing the second quarter review as the S&P500 hovers near all-time highs. Such is life. But, alas, here we are. Three months ago, investors were trying to parse through a whirlwind of tariff data, geopolitical uncertainty and the threat of a full blow trade war. It was the US against the world. If you had the ability to look at where we are today without knowing what happened yesterday, you never would have guessed the wild gyrations that the market took only 90 days ago. And, if you did know what happened yesterday, you would still probably have trouble digesting the simple fact that the best performing equity markets through the first half of the year are those outside the United States (something we haven’t been able to say in, well, decades), and by a longshot, too. Those who panicked and sold out in April paid a major price for their trigger-happy trading and missed out on an explosive run up of over 25% over the subsequent three months.
The numbers speak for themselves. The US S&P500 has posted a respectable YTD gain of about 7%. Developed markets (as measured by the MISCI EAFE index) are up nearly 20% YTD, and even emerging markets (as measured by the MSCI EM index, that is heavily weighted toward China) is up over twice that of the US S&P500 index at about 15%. All this despite the threat of the US slapping double (or triple) digit tariffs on our largest international trading partners.
Bonds, on the other hand, have been largely flat this year, but their importance cannot be overstated. Fixed income investors cheered during the trade spat in early April, and bonds did their diversifying duty of mitigating the bottom-line portfolio losses which investors hate to see on their statements. After a 40-year bull run in bonds (which ended in 2022), it’s not surprising to see the second-largest asset class take a breather for a bit.
And let’s not forget gold! Up nearly 25% YTD, extending its massive 80%+ run since 2022. Who would have thought!?
So where does that leave us when we look into our crystal ball for the end of the year? At the risk of sounding like a broken record – I have not a clue. Markets are unpredictable, and, as evidenced by the last 90 days, can surprise us in the craziest of ways. Kidding aside, there are many economic indicators showing that the second half of the year can add further gains to the already impressive run we’ve had since the Liberation Day tantrum. Companies continue to release positive forward-looking guidance, and earnings estimates continue to have a positive trend as we enter the 2Q earnings season. A caveat, especially with respect to US stocks, is that we’ve seen a drastic run up, one that has pushed us into ‘overbought’ territory from a technical perspective. This means that the old ‘two steps forward, one step back’ analogy is front and center again. We believe it would be healthy to see a moderate pullback in the near-term, which would bring valuations back to less extended levels and possibly set the stage for a late-year run.
We continue to have a favorable outlook for international stocks as well (talk about a broken record…), which remain cheap compared to their US counterparts and have hit breakout trends and new highs on multiple occasions this year. As with any party, it ain’t over till it’s over. Many don’t remember the pre-2008 days, but leading up to the financial crisis, international and emerging equities trounced US equities for over 10 consecutive years, so a longer bull run in international stocks is not without precedent. Factor in things like the current bullish sentiment, a lower US dollar and easy foreign monetary policy and you can quickly build a case for foreign stocks as part of a portfolio.
Diving into the portfolios, we continue to practice what we preach in the conference room and employ a globally diversified approach – which has worked exceedingly well so far this year. In the conference room, many were surprised to see that losses were not nearly as bad as they had thought early in the second quarter, largely thanks to bonds and international stocks which softened the blow imposed by US equities in April. We continue to hold a positive outlooks for US and international and emerging equities, and believe in the diversifying case for bonds but do not believe they will be major contributors to the portfolio bottom line through the end of the year. We continue to believe in other portfolio ‘diversifiers,’ such as gold, real estate and alternative investments, all of which have small-ish weightings across investment objectives (conservative-aggressive growth). These assets have proven their worth in the past and continue to serve a valuable purpose going forward.
To sum up the second quarter, it makes me think of one of the many sayings you often hear on the golf course: “they don’t ask you how, just how many” or “there are no pictures on the scorecard.” All we know is where we are today, and that isn’t such a bad thing.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Precious metal investing is subject to substantial fluctuation and potential for loss. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. show less.