GLOBAL MARKETS – TARIFFS: YES/NO/MAYBE?

The U.S stock markets finished the quarter on a strong note after having fallen into
or close to ‘bear-market’ territory in the first few days of the quarter. The S&P 500
Index rose 10.9% while the Dow Jones Industrial Average moved higher by 5.5%.
The Nasdaq composite soared 17.9%, while the MSCI All Country World Index
climbed 11.7%. The Bloomberg U.S. Aggregate Bond Index advanced 1.2%. U.S.
Treasury longer term rates rose modestly as the yield curve continued to exhibit
a partial inversion. The ten-year Treasury yield, at 4.20%, was three basis points
higher at quarter-end versus the prior quarter while the two-year Treasury yield
at 3.70%, fell 16 basis points. The three-month U.S. T-bill, at a yield of 4.30%, is
now seven basis points higher than the 10-year U.S. Treasury note. The spread
between these two maturities has narrowed dramatically from last quarter. The
yield curve is looking for a recession that is not on anybody’s radar now, even
though first quarter GDP was negative. A recession is defined as two
consecutive quarters of GDP decline and the second quarter of 2025 did not
indicate negative growth. This could be due to importers trying to get inventory
into the U.S prior to a possible sharp rise in tariffs. This may indicate that
companies are acutely aware of the lingering effect of an unprecedented level of
import tariffs. Companies are torn between absorbing tariffs or ‘sharing’ them
with end purchasers. Signs abound that the economy is again slowing and will do
so further in the months ahead. We are concerned about the economic
environment for the latter part of 2025.


The Federal Reserve has kept interest rates unchanged so far in 2025. But now at
the end of 2Q2025, change is in the air. Indications are the next move lower in
interest rates may happen in September with July likely being an outlier. The
current levels of inflation are still higher than the Federal Open Market
Committee’s (FOMC’s) desired target of two percent. Significant tariffs, if enacted
against some or many of our trading partners could be inflationary or at least that
is a stated concern of the FOMC. More on that if the economy slows and demand
subsides resulting in a deflationary scenario. THE FOMC will be behind the curve
yet again. One serious consideration for the FOMC; there is approximately $8
trillion dollars of US government debt (a third of the entirety) maturing over the course of the next 12 months. Rolling over this debt at current interest rates means
that our nation could be spending more servicing the debt than funding the
Department of Defense.


As we stated last quarter, market volatility was on our calendar. And indeed, it
turned out to be just around the corner. An entertaining way to start the quarter
was ‘Liberation Day’. I hope you had your popcorn ready.


We continue to believe that 2025 will be volatile. That volatility manifested itself,
if only for a few days. As noted previously, we are very concerned about a global
equity correction of even more substance and more longevity than occurred this
quarter. U.S equity valuations, particularly those that are technology related, are
still elevated today. The US market started the quarter trading at 23x forward
earnings, while some of the biggest US companies traded at double or triple that.
Paying forward for a decade of anticipated growth still makes little sense to us.


While longer term fixed income rates have remained relatively flat this quarter,
the interest rate spread between investment and non-investment grade
securities continues to trade at historically narrow levels, not reflecting realities
of the economy today or for the balance of 2025. Again, we expect the dollar
to continue to weaken in 2025. Our continuing search for and investment in undervalued assets requires patience and a healthy dose of optimism for humanity.

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