What is Your Flavor?
We are halfway through summer and, as always, it is hard to believe how quickly it has gone. Our office recently came together to enjoy an ice cream social, and we were amazed by how many flavors to choose from. When you break the flavors down to the most basic level, there is always some form of chocolate, caramel, and/or nut. The big decision is how you want it packaged – do you want your chocolate as ice cream, chips, or brownie chunks? Do you want your caramel swirled throughout the ice cream? Do you prefer nuts as pieces blended in or in peanut butter cups? Our economy and the markets can also be broken down to a very basic level, but in every cycle and when different factors are applied, we end up with different flavors. We have experienced this with the separation in performance between the domestic and international markets.
The first half of the year saw the US dollar decline, and US equity markets experienced increased volatility due to the uncertainty around tariffs. This laid the groundwork for international outperformance, which has been a great example of how and when diversification works well. Our client portfolios experienced volatility in certain segments of the portfolio, but this volatility was offset by the outperformance of the international segment of the portfolio. The purpose of diversification is to lessen volatility, which is exactly what has occurred this year. It is yet to be determined whether we are in a sustainable time of international outperformance or if this is due to tariffs.
At the end of last quarter, we experienced a decline in the market due to tariff negotiations and an impending tariff deadline. Tariffs still weigh heavily on the economic outlook, but investors have been set at ease by the pause. As of this quarter end, the S&P 500 was up around 5.5% year-to-date, with much of that return coming in this last quarter as the S&P 500 was up over 10% quarter-to-date. With the new impending tariff deadline of August 1st, we may see additional volatility in the upcoming months as negotiations pick up and potential tariffs take effect. As of today, we are unsure what effect tariffs will have on the economy. In anticipation before tariffs went into effect, we saw demand for certain goods increase due to consumers buying up old inventory. Initially key sectors such as manufacturing and agriculture saw increases in prices on many items such as lumber, steel, fruits, vegetables, and automotive. The full extent of the impacts from tariffs can take longer to materialize as businesses adjust their supply chains, consumers alter their purchasing behavior, and the overall economic landscape evolves. Hopefully, the currently proposed reduction in tariff rates will balance out the uncertainty.
The Fed has kept rates steady, though the market and many economists believe they will lower rates still this year. The decision to keep rates steady has been difficult given pressure from the current administration, but the Fed is faced with a challenging balance to maintain economic resiliency when faced with the possibility that tariffs could reignite inflation.
Therefore, the US economy is experiencing a mixed picture. While a stable job market and cooling inflation are positive signs, declining GDP growth, rising consumer debt and uncertainty surrounding trade policy are areas of concern. Nobody knows how all these factors will play out. If only the outcome were as easy as choosing ice cream.
So, what flavor of ice cream did we choose? We had a few traditional selections among our group, some more interesting combinations and one more bold scoop, trying the bubble gum flavor. We hope you are enjoying this summer and treat yourself to a favorite flavor. We will continue to monitor the developments in the months ahead as we sift through the ever-changing landscape. We are looking forward to meeting with you soon and discussing how these basic economic and market factors could impact your unique scenario.
Thomas L. Menzel, CFP® Laura A. Biermann, CFP®
President, Principal Owner Vice President, Principal Owner
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