Executive Summary:
- Stocks Recover from Early April Tariff Sell-off, as Negotiations Continue
- Fed Remains on Hold, Watching Tariff Effects and Resisting White House Pressure
- Markets Take Iran Air Strikes in Stride, Seeing Them, at Least Currently, as Successful
- “Big, Beautiful” Fiscal Legislation Moves Toward Passage While Revealing Sobering Realities
- Thayer Portfolios Add Slightly to NASDAQ and Non-U.S. Stocks, Make Fund Change in Income Strategy
Commentary:
What happened in the financial markets in 2025’s second quarter?
Looking like a reversed videotape of sinking ships, stocks fully recovered from their sharp, early April drop by quarter-end.
In the four trading sessions following President Trump’s April 2nd tariff plan announcement, the S&P 500 skidded by 12.1%, bringing its decline from a February 19th all-time high to 18.9%, close to the 20% bear market designation. But as the quarter closed, the S&P had edged ahead of the February high. The turn began with a tacit nod by Trump to the market gods on April 9th, placing a 90 day hold on the aggressive “reciprocal” elements of the tariff plan. Even as the moratorium expires on July 9th, markets seem to have adopted a more measured attitude about what actually will take place (continuing negotiations are assumed), and the White House has discounted the importance of that date.
The S&P’s quarterly gain of 9.8% was echoed by continued strength in non-U.S. markets, with the EAFE ETF rising 11.3%. Year-to-date gains for the two benchmarks stand at 4.9% and 20.3% respectively. The non-U.S. markets have been aided by roughly an 8% drop in the dollar, the latter reflecting not only tariff worries but debt and fiscal spending concerns, as Congress deliberates over the “big, beautiful bill”, which includes extending the 2017 Trump tax cuts.
The second quarter also saw a resurgence in the technology sector from its weak start to 2025, on ebbing fears of tariff dislocation and continued strong corporate performance and future guidance. The tech-heavy NASDAQ enjoyed a 17.8% resurgence in the quarter, bringing the year-to-date return into positive territory, up 5.5%.
Where is Fed policy and has the stagflation fear been overplayed?
Jerome Powell has used the phrase “tariff inflation” often, usually as he makes his case for waiting a bit longer before enacting a dovish, rate cutting policy shift. But now months into a new higher tariff regime (including a worldwide 10% tariff, 30% tariffs on China, and 25% surcharges on steel and aluminum from various countries), we have yet to see them filter through the main inflation gauges. The Fed’s favored PCE index for June showed a reasonable 2.3% annual rate, around three-year lows. Powell’s thinking is that we have yet to see the effects, but likely will, as companies consider whether, how, and when to pass through higher costs to end-market consumers.
The Fed’s hold at a 4.25-4.50% policy rate, where it has been since 1.00% worth of cuts over three meetings late last year, now stands in contrast to the ECB, which has cut rates eight times in 2025, to a thrifty 2.00%. The Fed’s rectitude may reflect not only Powell’s tariff wariness but also the Fed’s unique “dual mandate”, meaning it seeks full employment along with stable prices. The Fed currently still sees an effectively fully employed workforce – our 4.2% unemployment rate is at the low end of the historical range — and an overall economy that continues to defy the bears, still growing at low single digit rates.
Powell’s hold of course frustrates President Trump. Lower rates would be welcome to all borrowers, including the U.S. government, as would a potentially enhanced GDP growth rate. With Powell’s term running into May of next year, public acrimony is likely to continue. On this backdrop, investors still expect the Fed to begin another round of cuts later this year once the tariff effects are better seen.
What are possible impacts of the Iran military campaign?
After an immediate downward reaction following Israel’s airstrikes on Iran in mid-June, stocks have been resilient, including the brief U.S. bombing mission. Oil prices quickly jumped, but have since retreated to pre-strike levels. Sensitivity persists, with a 25-30% share of world oil production coming from the Persian Gulf, which has an Iranian north coast, a south coast with more moderate states hosting U.S. troops, and the narrow Strait of Hormuz the only tanker passage at the east end. But markets seem to have gamed out that an Iranian move to close or constrict the Strait would inflict as much or more pain on our adversaries (exporter Iran, key buyer China) as on the U.S., whose economy is far less dependent on Mideast oil than in decades past.
The efficacy of both the Israeli and American air strikes on Iran’s nuclear assets continues to be assessed and debated. Financial markets and the general public alike have taken solace that human casualties have been low (the U.S.’s Operation Hammer as well as an Iranian response against a U.S. army base in Qatar both reporting no deaths). Moreover, Iran’s leadership and exhibited counterstrike firepower have looked tepid, at least so far.
Investors may also be welcoming an effort, led by the U.S., to pivot toward peace. The longer a calm persists, the more successful the strikes will appear. Trump’s hand as he moves to economic and other policy matters may improve as he looks stronger both here and abroad, even though he may have been pulled in to hit Iran only because of Israel’s initial attack.
What are the prospects and market implications of the current fiscal legislation?
President Trump’s fiscal package has been lurching its way through Congress, with some version likely to be signed by the president imminently, and to become law in coming months. The simple reason for this is that without this action, the 2017 tax cuts from Trump’s first term would lapse at the end of 2025, sharply raising taxes on corporations and individuals. The latter event would seriously compromise GOP prospects and retention of both their slim House and majorities in the 2026 midterms.
One of the biggest elements, a reduction of Medicaid spending on the order of $900+ billion, has been problematic and may still be adjusted. The cuts are seen as too deep by Democrats as well as moderate Republicans. Rural counties would see reduced health care coverage of their citizens, compromised or closed hospital services, and job losses. While an effort to wring out waste, fraud, and abuse from the Medicaid budget is popular, the perception here is that the cuts go beyond that and break with what had been assured in prior months by the president and GOP leadership.
The most sobering aspect of the fiscal action is the general inability to do much to alter the $1.5-2.0 trillion a year budget deficit path, and most analysts see this bill adding two or three trillion to the nation’s debt (currently just over $36 trillion) over ten years. In a regime of higher interest rates versus a few years ago, annual debt service costs now stand at a staggering $776 billion, roughly one sixth of our federal budget, and not far behind our $850 billion defense tab. With interest payments providing no direct benefit, this points to increasing underproductivity of our tax dollars, and a steady headwind to economic growth.
Summary
As always, we counsel an approach based on maintaining discipline, and diversification across sectors and geographies in order to mute volatility while also casting a wider net for attractive opportunities. We feel it is helpful to downplay the daily noise, instead keeping the longer-term mission in mind. At the same time, we value and retain the ability to make tactical adjustments along the way, as conditions change.
We hope that you are enjoying the summer so far. Please let us know at any time if you have questions or concerns.
David Beckwith, Chief Investment Officer
Thayer Partners Quarter 2 Investment Commentary
Executive Summary:
Commentary:
What happened in the financial markets in 2025’s second quarter?
Looking like a reversed videotape of sinking ships, stocks fully recovered from their sharp, early April drop by quarter-end.
In the four trading sessions following President Trump’s April 2nd tariff plan announcement, the S&P 500 skidded by 12.1%, bringing its decline from a February 19th all-time high to 18.9%, close to the 20% bear market designation. But as the quarter closed, the S&P had edged ahead of the February high. The turn began with a tacit nod by Trump to the market gods on April 9th, placing a 90 day hold on the aggressive “reciprocal” elements of the tariff plan. Even as the moratorium expires on July 9th, markets seem to have adopted a more measured attitude about what actually will take place (continuing negotiations are assumed), and the White House has discounted the importance of that date.
The S&P’s quarterly gain of 9.8% was echoed by continued strength in non-U.S. markets, with the EAFE ETF rising 11.3%. Year-to-date gains for the two benchmarks stand at 4.9% and 20.3% respectively. The non-U.S. markets have been aided by roughly an 8% drop in the dollar, the latter reflecting not only tariff worries but debt and fiscal spending concerns, as Congress deliberates over the “big, beautiful bill”, which includes extending the 2017 Trump tax cuts.
The second quarter also saw a resurgence in the technology sector from its weak start to 2025, on ebbing fears of tariff dislocation and continued strong corporate performance and future guidance. The tech-heavy NASDAQ enjoyed a 17.8% resurgence in the quarter, bringing the year-to-date return into positive territory, up 5.5%.
Where is Fed policy and has the stagflation fear been overplayed?
Jerome Powell has used the phrase “tariff inflation” often, usually as he makes his case for waiting a bit longer before enacting a dovish, rate cutting policy shift. But now months into a new higher tariff regime (including a worldwide 10% tariff, 30% tariffs on China, and 25% surcharges on steel and aluminum from various countries), we have yet to see them filter through the main inflation gauges. The Fed’s favored PCE index for June showed a reasonable 2.3% annual rate, around three-year lows. Powell’s thinking is that we have yet to see the effects, but likely will, as companies consider whether, how, and when to pass through higher costs to end-market consumers.
The Fed’s hold at a 4.25-4.50% policy rate, where it has been since 1.00% worth of cuts over three meetings late last year, now stands in contrast to the ECB, which has cut rates eight times in 2025, to a thrifty 2.00%. The Fed’s rectitude may reflect not only Powell’s tariff wariness but also the Fed’s unique “dual mandate”, meaning it seeks full employment along with stable prices. The Fed currently still sees an effectively fully employed workforce – our 4.2% unemployment rate is at the low end of the historical range — and an overall economy that continues to defy the bears, still growing at low single digit rates.
Powell’s hold of course frustrates President Trump. Lower rates would be welcome to all borrowers, including the U.S. government, as would a potentially enhanced GDP growth rate. With Powell’s term running into May of next year, public acrimony is likely to continue. On this backdrop, investors still expect the Fed to begin another round of cuts later this year once the tariff effects are better seen.
What are possible impacts of the Iran military campaign?
After an immediate downward reaction following Israel’s airstrikes on Iran in mid-June, stocks have been resilient, including the brief U.S. bombing mission. Oil prices quickly jumped, but have since retreated to pre-strike levels. Sensitivity persists, with a 25-30% share of world oil production coming from the Persian Gulf, which has an Iranian north coast, a south coast with more moderate states hosting U.S. troops, and the narrow Strait of Hormuz the only tanker passage at the east end. But markets seem to have gamed out that an Iranian move to close or constrict the Strait would inflict as much or more pain on our adversaries (exporter Iran, key buyer China) as on the U.S., whose economy is far less dependent on Mideast oil than in decades past.
The efficacy of both the Israeli and American air strikes on Iran’s nuclear assets continues to be assessed and debated. Financial markets and the general public alike have taken solace that human casualties have been low (the U.S.’s Operation Hammer as well as an Iranian response against a U.S. army base in Qatar both reporting no deaths). Moreover, Iran’s leadership and exhibited counterstrike firepower have looked tepid, at least so far.
Investors may also be welcoming an effort, led by the U.S., to pivot toward peace. The longer a calm persists, the more successful the strikes will appear. Trump’s hand as he moves to economic and other policy matters may improve as he looks stronger both here and abroad, even though he may have been pulled in to hit Iran only because of Israel’s initial attack.
What are the prospects and market implications of the current fiscal legislation?
President Trump’s fiscal package has been lurching its way through Congress, with some version likely to be signed by the president imminently, and to become law in coming months. The simple reason for this is that without this action, the 2017 tax cuts from Trump’s first term would lapse at the end of 2025, sharply raising taxes on corporations and individuals. The latter event would seriously compromise GOP prospects and retention of both their slim House and majorities in the 2026 midterms.
One of the biggest elements, a reduction of Medicaid spending on the order of $900+ billion, has been problematic and may still be adjusted. The cuts are seen as too deep by Democrats as well as moderate Republicans. Rural counties would see reduced health care coverage of their citizens, compromised or closed hospital services, and job losses. While an effort to wring out waste, fraud, and abuse from the Medicaid budget is popular, the perception here is that the cuts go beyond that and break with what had been assured in prior months by the president and GOP leadership.
The most sobering aspect of the fiscal action is the general inability to do much to alter the $1.5-2.0 trillion a year budget deficit path, and most analysts see this bill adding two or three trillion to the nation’s debt (currently just over $36 trillion) over ten years. In a regime of higher interest rates versus a few years ago, annual debt service costs now stand at a staggering $776 billion, roughly one sixth of our federal budget, and not far behind our $850 billion defense tab. With interest payments providing no direct benefit, this points to increasing underproductivity of our tax dollars, and a steady headwind to economic growth.
Summary
As always, we counsel an approach based on maintaining discipline, and diversification across sectors and geographies in order to mute volatility while also casting a wider net for attractive opportunities. We feel it is helpful to downplay the daily noise, instead keeping the longer-term mission in mind. At the same time, we value and retain the ability to make tactical adjustments along the way, as conditions change.
We hope that you are enjoying the summer so far. Please let us know at any time if you have questions or concerns.
David Beckwith, Chief Investment Officer