Three Key Thoughts:

1. Positive Returns Across the Globe
2. Geopolitical Fireworks
3. Tariffs Back at Center Stage

Positive Returns Across the Globe
After hitting all-time highs in February, US stocks drifted down for several weeks. Then President Trump’s reciprocal tariff announcement in early April knocked stocks down another 12% in just a few days, bringing the decline from the peak to nearly 20%, a traditional bear market measure. In short order, Trump retreated, providing a 90-day reprieve from his reciprocal tariffs, providing time for negotiations.

As first quarter earnings reports were released in April and May, it became clear that growth was continuing, despite the tariff turmoil, and companies remained in solid financial shape. The combination of tariff deferral and good earnings reports allowed US stocks and bonds to rally very sharply off their mid-April lows.

But US investments were NOT the stars in the first half of the year. Non-US stocks trounced their US counterparts with the help of a sharply falling dollar. That falling dollar also helped non-US bonds deliver exceptionally good results, handily beating their US dollar competitors.

Geopolitical Fireworks
Trump’s tariff announcement in early April was not the only source of fireworks this past quarter. In addition to its battle against Hamas and Hezbollah, Israel decided to strike Iran’s nuclear capabilities directly, destroying some facilities and killing many senior scientists and military leaders. After several warnings from Trump were ignored by the Iranian leadership, the US joined the attack, inflicting more damage on nuclear facilities. What was most surprising, however, was response of Iran and its supposed allies, Russia and China. Iran was able to hit Israel with a few missiles but its response to the US was very tepid. Meanwhile, Russia and China were basically silent, offering only rhetorical support. Iran quickly shifted to negotiating a ceasefire and claiming victory, even though the Israeli and US attacks met with little resistance.

This brings us to Russia’s strategy in Ukraine. Trump readily understood that Iran was not going to seriously negotiate over its nuclear program absent an actual show of force demonstrating our ability to destroy their capabilities. Yet, he has not been able to bring himself to apply the same logic to Putin. Putin clearly has no interest in peace – he intends to drag the war on as long as possible, expecting the US and its allies to tire of the effort and expense involved in supporting Ukraine. He was likely pleased to see the US distracted from Ukraine by its foray into Iran. So far Putin’s plan seems to be working as he has made slow progress in recapturing territory while blowing off Trump’s peace overtures. We don’t expect this trajectory to change until Trump changes his approach. For now, though, Trump’s focus has shifted to tariffs.

Tariffs Back on Center Stage
With his tax package now approved by Congress and signed into law, Trump’s priority is back to his tariff program. We have already written on a couple of occasions about our views on the mistaken rationale of this entire venture. Unfortunately, we believe that Trump will continue to press tariffs wherever he and his advisers believe they may be needed for so long as the courts allow him to do so (recall that this tariff program is based on emergency powers granted the President, leaving an open question for the courts as to whether there is an emergency). To complicate the situation further, Trump has returned to spouting off (usually through social media) changes to his ideas literally by the hour. This just adds confusion to an already chaotic stream of potential trade deals with important trading partners.

The markets took some solace that Treasury Secretary Bessent was apparently put in charge of the trade negotiations a few months ago. He was successful in putting together the framework for a China deal in relatively short order. And the Secretary has also kept a close eye on market reactions to the entire tariff program, making sure that the uncertainty of the negotiations doesn’t hinder the functioning of the bond or stock markets. So far, the markets have not reacted much to the reintroduction of deadlines and threats of very high tariff rates. With market valuations at high levels and credit spreads very tight, it wouldn’t take much to cause a significant reaction.

Investment Implications
In many ways, we are back to where we were earlier in the year: high market values in both bonds and stocks while concerns mount about higher tariff-induced inflation and/or slowing economic growth. The markets had trouble advancing then and likely will now without a resolution of these concerns We continue to believe that well-diversified portfolios with exposure to global equity and fixed income markets are most appropriate for this environment.