Q2 2025 was one of the most dramatic market quarters in many years. The volatile trading action began with trade / tariff policy shock on April 2, 2025. Investor fears of a world where the United States sought to punitively level high tariffs on the entire world were a frightening revelation.
A vigorous rebound then began as the S&P 500 gained 10.9% in the second quarter after April’s tariff-induced selloff, while bonds notched a modest gain of 1%. See Morningstar for a complete market summary.
The moves in the S&P 500 after the punitive tariff announcement, branded “Liberation Day” by the White House are illustrative of the volatility that rocked the markets.
4-2-25 S&P Close 5670
The major US stock indexes, including the Dow, S&P 500, and NASDAQ, closed higher in regular trading, anticipating a tariff announcement. The president’s proclamation after the optimistic market close was beyond the most pessimistic expectations.
4-3-25 S&P Close 5396
Initial reaction sent the index down 4.9% in one day, this magnitude of correction generally would occur once a year and not all on one day. This day was better titled “Revelation Day” for how negative markets became from the words of the US President.
4-4-25 S&P Close 5074
Additional 6% down, selling cascade develops as markets project negative consequences of historic proportion. All three major indexes posted percentage drops similar to like the Covid-19 market downswing of March 2020.
4-8-25 S&P Cose 4982
Another 1.6% down, this was the bottom of the event for a total decline of about 12% over four trading days. Historical comparisons to other market panics begin with scary analogies like Black Monday 1987 and even references to the 1930s.
4-9-25 S&P Close 5456
S&P up 9.5% in one day. A move of this magnitude is extremely rare. Stocks surged to one of the biggest gains since World War II after The President backed off his tariffs on most nations for 90 days even as he further jacked up the tax rate on Chinese imports to 125%
Markets developed the acronym “TACO” as the notion that so much of the trade war was amounting to empty threats. TACO = The President Always Chickens Out. This may prove optimistic as the sequence of grandiose threat / reduction creates a lane for quiet policy shift like the 10% universal tariff.
Additional timeline events:
4-14-25
The President says he might temporarily exempt the auto industry from tariffs he previously imposed on the sector, to give carmakers time to adjust their supply chains.
4-29-25
The President signs executive orders to relax some of his 25% tariffs on automobiles and auto parts — aimed at easing import taxes for vehicles that are made with foreign parts, but assembled in the U.S.
5-4-25
The President threatens a 100% tariff on foreign-made films, while claiming that the movie industry in the U.S. is dying. It isn’t immediately clear how such a tariff on international productions could be implemented, but he says he’s authorized the Commerce Department and the U.S. Trade Representative to “immediately begin the process.”
Equities have remained extremely resilient in the US and globally after the initial sell-off. The threats to global trade, followed by pauses and negotiation announcements could not have been more erratic and disruptive. The unfortunate dynamic of our current president to overpromise, underdeliver, and change the subject. Overlooked are all the companies and institutions that must accommodate unpredictable and erratic changes to a system that has been developed since the 1940s. The next episode is tariff adaptation, avoidance / evasion, and some amount of actual domestic reshoring. The complexity of tariff enforcement is unlikely to be vigorously funded as big institutions and business undermine these bad ideas.
It is unlikely that this nationalist fever is some sort of path to enhancement for the US or global economy. There is no genius negotiation tactic here. The rapid cycle of threat, suspend, and then exception is political sloganeering clashing with decades of trade development. Much of what has been foisted on our economic and political system has a difficult time translating to governance or actual implementation.
The current narrative suggests that the negative consequences of policy shock has been overestimated. Voices that imply that these trade ideas are somehow a good policy shift are quickly pointing to a few months of data that do not reflect significant price inflation or labor market disruption. While it is welcome to see the markets post a robustly positive quarter, it is likely that the consequences of an effort to undo decades of economic development will take more than 90 days for the impacts to be revealed. Buckle up for choppy markets ahead.
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Conflict in the Middle East has been a recurring theme and threat to the global economy since the 1950s. The human suffering is catastrophic and unimaginable; we can all agree and yearn for a more peaceful reality across the region. The United States has traversed a complex path that was primarily focused on stable and consistent access to petroleum.
The idea of open conflict with Iran has always been restrained by the fear of energy market disruption. The multiple energy crises of the 1970s have little relevance in 2025 as the United States is currently the world’s largest petroleum producer. This does not mean that significant Middle Eastern oil supply instability would not have dramatic impacts to the global economy. Oil is priced on global markets and determined by international supply and demand. The structural advantages possessed by the United States buffers against an energy crisis and may well initiate an upswing in domestic energy production and related economic activity.
There is no predicting the oil supply impacts, multiple instances of proactive bombings of weapons development in Iraq in 1981 and Syria in 2007 had little in the way of oil market disruption. The economic consequences of these actions fit a pattern of initial negative market reactions followed by the usual economic adaptation, innovation, and ultimately progress.
On 6-23-25 Forbes Magazine published, “Why Wars Rarely Kill Bull Markets: The Contrarian Case For Stocks”
“Consider the events of Pearl Harbor. Yes, the incident shocked the country, and the markets collapsed. However, this did not persist for an extended period. Despite the global war, the U.S. stock market reached its lowest point by the middle of 1942. The S&P 500 almost doubled by the conclusion of WWII, making it one of the biggest wartime rallies ever. The war had accelerated U.S. industry, and the markets followed suit.
The Gulf War followed the same path. The market fell as troops queued up in 1990. But when the bombs started to fall and things were clearer, investors rushed back. The S&P had gone up more than 15% in just six months.
It happened again in 2003. There were concerns regarding Iraq, oil, and the market. But what happened within a year of the invasion? The market experienced a surge of 30%. And when Russia invaded Ukraine in 2022, markets fell for a while. Stocks in defense and energy rose quickly. What you should remember is headlines don’t make markets move; expectations do. When investors price in fear, opportunities typically follow shortly after.”
This is certainly a case where the unconventional dynamics of the current White House has yielded a successful military action that has been feared for years with little geopolitical blowback. Declaring victory after 12 days of bombing and then cease fire is Reminiscent of the infamous “Mission Accomplished” moment on May 1st 2003 by the Bush administration.
Initial impacts seem to be muted and the hammer hanging above nuclear ambition in the middle east may inhibit or at least slow further development. The innovation of US energy production has limited the economic consequences.
The conflict lasted a short 12 days and has receded from media headlines. It is unlikely that much was solved, and these challenges are likely to resurface unexpectedly.
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On January 24, 1933 The NYT published an article entitled, “Einstein’s Address on World Situation”.
“According to my conviction, it cannot be doubted that the severe economic depression is to be traced back for the most part to internal economic causes: the improvement in the apparatus of production through technical invention and organization has decreased the need for human labor, and thereby caused the elimination of a part of labor from the economic circuit and thereby caused a progressive decrease in the purchasing power of the consumer.”
The idea that technology will destroy the need for human labor has been a recurring theme since the beginning of the industrial revolution. This became a pervasive and grossly mistaken belief that modern industry could now produce more goods than people would ever want to buy, leading to an inevitable and persistent surplus. This is an example of one of the greatest minds in science wading into the realm and complexity of economic analysis. It is a wakeup call for anyone who seeks real time understanding to unpredictable financial challenges of society.
Economics has a long track record of humiliating anyone attempting assessment or forecasting. It may be that the only mechanism that can mediate the challenges faced by society are markets. Open competition that seeks opportunity and potential wealth has proven repeatedly as a ruthless and cruel arbiter for the productive advancement of living standards. Einstein came from a world of mathematics and scientific experimentation. Economics is a blend of hard science and the infinite complexity of human behavior.
Misbegotten theories about how society faced a dire future can be found throughout modern history. Investors must continue to remind themselves that innovation and creativity have been a crucial component of advancing living standards throughout time. This process has not been linear and there have been long periods of stagnation and difficulty, but progress and economic productivity have consistently shone that pessimism is the wrong view.
Investment activity will not follow wishful aspirations currently cascading through American politics. The flawed notion that the federal government can force the economy in a direction of its choosing is unfortunate and clumsily delaying where productive assets and development can go.
In the book Narrative Economics: How Stories Go Viral and Drive Major Economic Events, Author and Nobel prize winner Rober Shiller wrote: “The US Senate in Washington, DC, replaced its non-dial phones with dial telephones in 1930, the first year of the Great Depression. Three weeks after their installation, Senator Carter Glass introduced a resolution to have them torn out and replaced with the older phones. Noting that operators’ jobs would be lost, he expressed true moral indignation against the new phones: I ask unanimous consent to take from the table Senate resolution 74 directing the sergeant at arms to have these abominable dial telephones taken out on the Senate side”
This is a striking example of the denial of technological progress, which has consistently created many more new opportunities than it eliminated. Trade policy in 2025 is another version of this error. Tariffs represent a challenging break to decades of belief that promotion of free trade would create the best outcome for the United States and the wider world. History has many lessons for policy makers that will often be ignored and then painfully re-visited. Blathering about ‘America First’ ignores the notion that the world economy is not a zero-sum proposition. As other regions prosper, trade and economic interaction creates a win-win along with many occupations suffering domestically. The nationalist chest thumping is blunt reaction to economic evolution with tragic disregard to the growth of the last 85 years.
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Populist ideas that are in denial of evidence such as the federal government can create effective economic incentives for childbirth. These policies have been attempted globally as the fears of declining population along with nationalist and xenophobic impulse drive what is referred to as “pro-natalism”.
Hungary (a country of 9.5 million people, the state of New Jersey has about the same amount) is a current inspiration of many of the ideas of current conservative political narratives. The idea that a former vassal of the Soviet Union is an example of anything is preposterous. The Economist recently pointed out that, “Hungary’s prime minister, Viktor Orban, started a big pro-natal push in 2011, and has since given parents everything from tax breaks and cash handouts to free childcare. These policies cost a staggering 5.5% of the country’s GDP annually—more than almost any government will spend on an ageing population in any year between now and 2050. In February mothers of two were promised a lifelong exemption from income tax. Hungary’s fertility rate rose to 1.6 children per woman in 2018, from 1.2 in 2011, making it a poster child for populist pro-natalists everywhere. However, it has since dipped, suggesting handouts encouraged some mums not to have more babies, but to have the same number sooner.”
Declining birth rates as economic opportunity has expanded in the western world is one of the great challenges that society currently faces. As productivity has risen and more women have entered the workforce, the economic incentives of having large families has been dramatically impacted. As this commentary has discussed on multiple occasions the 1970s were ironically focused on the opposite problem of global overpopulation.
It is difficult to theorize about potential solutions to this dynamic of modern society. There is certainly a role for government to play, yet the evidence of efficacy of economic incentives would suggest cash payments or some type of government framework will result in disappointment.
Immigrants tend to have larger families and yet we are witness to vehement nativist messaging. Footage of squads of immigration enforcers wearing masks and rounding people up aggressively is ironic as the Washington Post recently published, “Immigrant drive population growth in a graying America, census shows”… “Immigration is driving U.S. population growth and helping offset a broader demographic shift as the baby boom generation ages, according to data from the U.S. Census Bureau.”
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Markets have been whipsawed by daily proclamations from the current American President. This commentary has provided a consistent disclaimer that we take no political positions beyond attempting to contemplate the economic implications. It is our position that what has historically been positive and productive for Americans happens near the center of our ideological spectrum.
There has been endless hand wringing and histrionic pronouncements of the decline of Democracy and the significant alteration of the American system. The fire hose of presidential actions known as “executive orders” has had a disruptive impact in a matter of months.
The notion of “Executive Action” is crucial to consider. Talk of American civics sounds naïve and passe. Pessimism regarding the resilience and functionality of the co-equal branches of government may prove to be short sighted. Current concerns ignore the potential for future political personalities or brewing public fatigue of ten years of provocateur(ism).
Combative action towards universities and public health, with a special emphasis on removing diversity, equity and inclusion initiatives are a few of the main corridors that are being impacted by the current Republican administration. As these efforts occur, it is difficult to perceive that extent of the overreach and denial of just how unpopular much of this extreme right-wing activity may prove to be.
On June 15th 2025, the WSJ reported that in “April $790 million of in federal funds to the Illinois university (Northwestern) would be frozen, but that number has never been detailed or communicated directly to school officials, a school spokesman said.” The idea that it is good to cut off with no notice funds to a marquee institution like Northwestern University ignores the disruption of all sorts of scientific study and the economic impacts to the regional economy.
The president’s threats to cut federal funding from California after recent protests would hinder the innovation capital of the world, especially with actions against its universities. Silicon Valley is watching as the president threatens to ban international students and bully the gigantic California economy.
Anti-immigrant, China and intellectual sloganeering may work on a political landscape of weak Dem and GOP parties, but it is unlikely to create lasting change or sustainable political capital. The governing strategy to employ a firehose of provocation while the wheels of the court system slowly turn is unlikely to appeal to most voters. Announcement of disruptive policies, in rapid succession, lose in court, appeal, get a stay and let the problem fester as some sort of leadership is a strange way to spend time in power.
Conservatives have been placed into the odd position that the federal government can dictate all manner of disruptive policies at the state level given the history of “States Rights”. These actions are unlikely to have the lasting impact that admirers of American democracy currently fear.
Judging what may happen by extrapolating current dynamics is something that we have discussed repetitively in these commentaries (recency bias). Concluding that there is any longevity or natural successor that could fill a role in The Apprentice season 3 would seem to be in denial of historical American political patterns. The unique nature of the current star of the show would seem to render our next phase to be much different and possibly a reckoning.
The American system is certainly being tested, forced to bend like a palm tree in a hurricane. The branches of government, layers of state and local systems have a resilience that will likely be celebrated sooner than we may expect.
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During the 2024 campaign that was won by the republican candidate, one of the paramount issues was the idea of something referred to as project 2025. In July 2024, the republican candidate proclaimed, “I know nothing about …I disagree with some of the things they’re saying and some of the things they’re saying are absolutely ridiculous and abysmal.”
We are now witness to a federal government that has been populated with a group of true believers in the “abysmal.” One of the originators of these ideas has been appointed to lead the Office of Budget Management (Russell Vought) along with numerous other key positions throughout the federal government.
This is the effective driver of the extreme social and economic policy that we are witnessing. The fundamental objective is a controversial idea known as “unitary executive theory.” In practice, that would streamline decision-making, allowing the president to directly implement policies without the cumbersome checks and balances that are the essence of American governance.
These ideas are inherently destabilizing and counter to decades of economic growth based on stable and predictable federal policy. The governing process of impulsive proclamations by a president who is continuously declaring emergencies is unlikely to be sustainable. The fundamental economic dynamics of these ideas are counterproductive and likely to spark backlash as people lives do not change and may be negatively impacted.
The economic linchpin is that factory jobs of the past can be reclaimed. Central to the daily chaos is the idea that one person can unilaterally proclaim drastic structural changes to the American and global trade systems. The Economist recently articulated that, “Factory work is overrated. Here are the jobs of the future. America is trapped by its industrial fantasies.”
Here we can see a persuasive argument about just how wrong headed these trade ideas are… “even if industry returns, the old jobs will not. Manufacturing produces more than in the past with fewer hands—a transformation much like that undergone by agriculture. Accessible, middle-class work of the sort that once drew crowds to the factory gates in America’s Fordist heyday has all but vanished. According to our analysis, the most similar work to the manufacturing jobs of the 1970s is not to be found in factories, which are now automated and capital-intensive, but in employment as an electrician, mechanic or police officer. All offer decent wages to those lacking a degree.” “As countries grow richer, automation raises output per worker, consumption shifts from goods to services, and labour-intensive production moves abroad. But this does not mean factory output collapses. In real terms, America’s is over twice as high as in the early 1980s; the country churns out more goods than Japan, Germany and South Korea combined. As the Cato Institute, a think-tank, points out, America’s factories would, on their own, rank as the world’s eighth-largest economy.”
On June 23rd 2025 it was pointed out by the New York Times, “Why Factories Are Having Trouble Filling Nearly 400,000 Open Jobs…For every 20 positions, there’s one qualified candidate, says one manufacturing chief executive.” “The pool of blue-collar workers who are able and willing to perform tasks on a factory floor in the United States is shrinking. As baby boomers retire, few young people are lining up to take their place. About 400,000 manufacturing jobs are currently unfilled, according to the Bureau of Labor Statistics — a shortfall that will surely grow if companies are forced to rely less on manufacturing overseas and build more factories in the United States, experts say.”
Despite multiple announcements recently by the largest US pharmaceutical companies regarding investment in domestic manufacturing most prescription drugs used in the US are generic. On June 8th 2025, the WSJ published a piece that began, “Generic Drugmakers Resist Trump’s Calls for More U.S. Manufacturing. Companies say further domestic investment is too risky in such a low-margin and unpredictable business.”The article points out that the pharma company announcements do not include generic drugs which make up around 90% of the usage in the US.
Generic drug manufacturing has evolved over decades of time. It is a difficult business that has low profit margins. Establishing new supply chains in the United States cannot be rationally financed when the rules of trade are changing daily.
The argument that there was a glorious manufacturing era in American modern history must be viewed in context. The post-World War II era was unique as the playing field was effectively rubble in many developed economies across Europe and Asia. Populist messaging that suggests there has been some sort of “rip-off”, leadership ineptitude, or failure of elites that have destroyed vibrant rust belt economies of the past ignores a multitude of other facts.
There is very little discussion of the migration of manufacturing out of traditionally unionized northern American states to southern nonunion regions. We have also pointed out that technology and automation has drastically diminished high school diploma blue collar opportunities.
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For some perspective, we went back and read the NYT from June 21st 1995. Here are a few of the items from 30 years ago:
War in Bosnia
Japan V USA “Trade War”
Lots of Classified Ads, Incl new and exciting 2-way pagers
6 Mo CD Rate was 4.5% at NBD
S&P at 543…6204 on June 30th 2025
Conflict, competition, along with business survival and extinction fill the history books back to Roman times. The level of progress of the last 30 years is astounding. This advancement has occurred in a world that is a continuously complex and difficult place.
Successful wealth building entails a belief in a brighter future. We sacrifice current cash flow to build a better life for ourselves while investment benefits society along the way. Our portfolios are hard at work every business day and 24/7 in pursuit of profits along with innovation and growth. Without the fundamental disposition of optimism, the idea of staying patient in the face of frightening circumstances becomes much more difficult.
Belief in the brightness of our times ahead is the only path that leads to effective investment outcomes. It is easy to mistake the current environment of disruption as something that will overrun yet to be invented adaptation and innovation. History teaches us to gather our courage, discipline, and vision for a tomorrow as it is quietly forming in complex and unpredictable fashion. Those that have retained quality diversified portfolios have been consistently rewarded. The task is to do nothing but wait, which is a very difficult thing to actually do!