2025 Midyear Market Update: Navigating Volatility, Tariffs, and Global Opportunities (EP.212)

0:29We all need to make smart decisions with our money. you with a mid-year update about just what's been going on in markets, the economy, and politics, and what it all means for investors like you. Now, I will be sharing a more in-depth webinar with my email subscribers on July 23rd, so you can use the link in the episode description to sign up for the newsletter, which is delivered to your inbox every other Wednesday. The first half of 2025 has reminded us once again that volatility is an inherent part of investing. Markets swung dramatically as investors navigated policy uncertainties, particularly around tariffs, but also we had a lot of headlines around inflation, around interest rates.

1:10But despite these turbulent times, global markets are actually higher for the year with some important lessons we can take away. Let's start with the market itself. In the US, the S &P 500 started the year strong, hitting new highs in February, but quickly reversed course with a steep 10.5 % drop over two days in early April, following the rollout of the aggressive tariffs by the new administration. Yet just days later, the markets rebounded sharply by 9.5 % after the pause in tariffs was announced. This back and forth, it underscores how sensitive markets can be to policy news and how challenging it can be to predict short-term moves in the market.

1:53Now, looking internationally, this half, we have seen a notable shift. After years of U.S. stock market dominance, international markets have outperformed significantly in the first half, with developed international stocks up roughly 15 % and emerging markets up around 12%, far exceeding the S &P 500's modest gains. Now, what you'll generally see is people explaining the shift being driven largely by a weaker US dollar, which has amplified the returns for US investors who are holding international equities. Speaking of the dollar, it's important to recognize that currency movements matter. So with the US dollar down around 8 % from its recent highs, it is currently at its cheapest level since 2022.

2:38And a lot of the guests that we had on at the beginning of the year We're talking about how the dollar was overvalued. And for diversified investors, this has provided somewhat of an unexpected tailwind because it makes foreign investments more attractive. Because if you think about when you buy foreign investments, you're taking your dollars and converting them into that foreign currency. But if you're going to take the returns in the foreign currency and bring it back into dollars, when the dollar is cheaper, it means that your foreign currency buys more dollars. So when the dollar is down, that can provide a boost to those international returns.

3:12Another key theme this year has been the resurgence of value stocks over growth stocks globally. Simply put, value stocks, which we're going to just define as those trading at lower relative prices to fundamentals, have outpaced growth stocks by a noticeable margin. But interestingly, small cap stocks and high profitability companies haven't fared quite as well, lagging behind the larger, less profitable counterparts. I think this underscores for any of those who are taking a factor approach that you need to be broadly diversified across factors rather than relying heavily on any single factor or certainly any recent performance trends.

3:53Turning to bonds, investors have experienced positive returns despite the ongoing volatility. U.S. Treasury bonds gained about 2.8 % as yields declined slightly from the recent highs, and then the globally diversified bond portfolios have also performed quite well, highlighting again the importance of holding bonds not just for the yield, but for the stability during turbulent times. In the corporate bond space, performance has been mixed. High-yield bonds have outperformed treasuries, buoyed by higher coupons and low spreads, while investment-grade corporate bonds have slightly edged out treasuries.

4:28Municipal bonds, though, they have faced some challenges, particularly due to the high issuance triggered by tax policy uncertainties and higher infrastructure costs. And while performance in the first half lagged, money bonds do remain pretty attractive, especially for those high tax bracket investors due to their tax exempt status. Now, we can't really talk about the first half of 2025 without talking a little bit about politics in the economy. Clearly, tariffs were the headline issue in the first half of 2025, with the average effective tariff rates hitting their highest level since the Great Depression, there was genuine concern among investors about their impact on inflation and economic growth.

5:07So far, inflation remains moderately elevated. Core inflation is around 2.8%, still above the Fed's target of 2%, but not yet quite what I would say is problematic. And despite these uncertainties, I think there's general consensus in the market that is showing, hey, we have a resilient U.S. economy, the labor market. Yes, it's cooling slightly, but it remains stable. And in fact, the improved conditions related to tariff policy have led many to believe that the Federal Reserve has room to maneuver, possibly even implementing one or two rate cuts later this year. The takeaway, I think, is that despite the real challenges, the economy is holding up better than many anticipated earlier in the year.

5:50And I think that one consistent theme is still just the value of diversification. We really don't know where the best returns are going to come from. And with the U.S. equities outperforming, at least over the past, let's say, two decades, many investors have understandably become heavily U.S.-focused. But the events of this year, I think, highlight just how quickly these trends can shift. Not only are we seeing really good returns overseas, we do see that European economies are benefiting from substantial fiscal stimulus, particularly in Germany. And the earnings outlook internationally is pretty favorable compared to the US.

6:26So there are lots of compelling reasons to maintain that globally diversified portfolio. So as I'm putting together the webinar that again, I will link to my newsletter where you will get that webinar delivered on July 23. And the key takeaways from that, they're pretty simple. I think it's stay diversified. You've heard me say that a few times. The shift towards international markets this year demonstrates why diversification is so crucial. Expecting volatility, these short-term market swings, they're tied to any number of stories. It's easy to point to political uncertainty, but just remember that when the market is moving, what's really happening is that people are adjusting their earnings expectations.

7:08We probably need to have an episode on that coming up, just how closely related earnings and price movements are. But most importantly, big takeaway from the first half, as always, stick with your long-term plan. Markets have a remarkable capacity to reward the patient, disciplined investors who resist knee-jerk reactions to headlines. Thanks, as always, for tuning into The Long-Term Investor. If you enjoyed today's episode, the best way to show your appreciation is by leaving a review in your podcast app. Again, thanks for listening, and until next time, to long-term investing. Thanks for listening to the Long-Term Investor Podcast.

7:47To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.