2025 Q2 Market Commentary - The Tariff Test
It might seem like a distant memory now, but just a few short months ago, there was an air of panic in the markets. On April 2nd, President Trump unveiled his “Liberation Day” tariffs, and over the next two trading days, the S&P 500 suffered its fifth-largest two-day decline since 1950. The index was already in negative territory on the year, and it would go on to fall 21% from its February 19th high to the low on April 7th. The CBOE Volatility Index (VIX) also reached a high of over 60 on that date. This index has a long-term average of around 20, and spikes above 60 were previously seen during the 2008 financial crisis and the 2020 COVID pandemic.
What happened next? President Trump extended most of the tariff deadlines and backtracked on some of the higher tariff amounts, causing volatility to collapse quickly and markets to surge higher. As you can see in the chart, the S&P 500 index has made a swift recovery and has already reached new all-time highs. From the April 7th low to July 3rd, the index rose 30%, and it finished the second quarter with a positive return of 11%. The S&P 500 wasn’t alone in finishing the second quarter strong, as small-cap US stocks posted an 8.5% return, while international developed market and emerging markets stocks were both up close to 13%.
Volatility wasn’t confined to the equity markets, as the ten-year Treasury yield dropped from 4.25% to end the first quarter to as low as 3.86% after the tariff announcement. It then spiked as high as 4.6% in May, before finishing the quarter close to where it started, around 4.25%. Despite the volatility, the Bloomberg Aggregate Bond Index managed to eke out a positive return of 1.2% for the quarter. In other asset classes, Gold posted another strong quarter with a 5% return, while REITs were down approximately 1% and the Bloomberg Commodity Index declined 4.1%.
In our first-quarter commentary, we discussed two significant reversals in performance trends compared to recent years. One of those reversals continued in the second quarter as international stocks beat US stocks again, driven by continued weakness in the US Dollar. The other reversal did not continue, as growth stocks surged back ahead of value stocks in the second quarter. This is evident in the chart below, where growth stocks were negative in the first quarter but led the way in the second quarter.
As usual, we don’t think anyone can accurately predict where things will go from here. Market participants seem to be ignoring the tariff news since the initial announcement in April. There is still considerable uncertainty about what tariffs will be applied and when they will take effect, and this appears to change daily. There was also no significant market reaction to the One Big Beautiful Bill Act, which was passed just before the July 4th holiday.
Instead of trying to predict what this administration might do next or what impact it might have on the markets, now is a great time to reassess your overall asset allocation. Use the volatility around the tariff announcement as a test for how you’ll react to the next sustained downturn in the markets. What was your reaction to the sharp selloff in April? Take a look at where your portfolio was on April 7th. At the time, did you wish you had less of your portfolio invested in equities?
We like to use risk tolerance questionnaires to help gauge what kind of risk you will be comfortable with in your portfolio. However, no questionnaire can replicate the real-world experience of living through volatility. If you felt uncomfortable in April, you may want to consider reducing the risk in your portfolio. The quick rebound from that April selloff means that you have the opportunity now to correct that imbalance. While you might incur some taxes on capital gains from rebalancing, you don’t want to let tax impacts drive your investment decisions. We can help you minimize any tax liabilities associated with rebalancing and incorporate that into your tax planning for this year.
The key point to remember is that reducing your stock allocation and rebalancing the portfolio is not intended to improve returns. The goal is to minimize volatility in the portfolio, enabling you to adhere to your long-term plan during periods of volatility. If you would like to reassess your asset allocation, don’t hesitate to schedule a meeting with us. We’re here to help ensure your portfolio is suitable for you and aligned with your long-term objectives.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.