Market Review Blog - Advisory Alpha (SEC Registered Investment Advisor)

A Modern Energy Shock

Advisory Alpha — Mon, 20 Apr 2026 14:49:39 +0000

Economic Shifts

The war in Iran has heightened uncertainty in the global economy, with hostilities materially disrupting global trade, energy flows, and capital allocations. These effects have been particularly evident in commodity markets. Oil prices surged sharply, while gold prices declined, an unusual relationship that may reflect sovereign nations liquidating gold to finance rising energy costs. Foreign equity also experienced meaningful losses, especially in regions dependent on Middle Eastern energy exports. During the most volatile periods, capital rotated rapidly out of risk assets and into perceived safe havens, including US dollars and select commodities.

A central driver of uncertainty remains the Strait of Hormuz, a critical passageway for global energy shipments. However, the issue extends beyond access, as the conflict has caused physical damage to key infrastructure. Most notably, natural gas facilities in Qatar were destroyed, with repairs expected to take years. Oil futures responded with one of the steepest monthly increases in recent history. This supply shock prompted a global shift in energy strategies, with several countries across Europe and Asia reactivating coal-fired plants to offset potential shortages, driving coal prices significantly higher.

Gold’s behavior during this period was particularly notable. Rather than functioning as a traditional store of value, it has acted more as a source of liquidity. Reports suggest that energy-dependent and sanctioned nations may have sold reserves during the crisis to fund energy imports and meet international obligations. Its decline during March may reflect not only shifting demand dynamics but also broader signs of global wealth destruction. The world may be currently destroying productive capacity faster than it can be replaced.

Despite these global pressures, the economy has remained resilient, though not immune to risks. Labor markets have continued to exceed expectations, retail sales remain firm, and exports have improved, driven by natural gas. However, forward indicators suggest rising input costs for manufacturers, signaling that the energy shock may soon impact industrial costs.

“During the most volatile periods, capital rotated rapidly out of risk assets and into perceived safe havens, including US dollars and select commodities.”

Global equities declined in March, with international markets underperforming US equities. Part of this repricing reflects a shift in interest rate expectations. Earlier in the year, investors expected multiple rate cuts. Now they expect policy rates to remain unchanged for the remainder of this year. Moreover, policymakers in Europe and Japan adopted a more hawkish tone, suggesting rate increases to counter energy-driven inflation.

As investors push into spring, focus will remain on the fragile ceasefire and Strait of Hormuz. While recent stabilization in equities and modest easing in energy prices offer some relief, the longer-term implications of infrastructure damage and supply constraints remain unresolved. Encouragingly, improving supply visibility, adaptive policy responses, and resilient economic fundamentals position global markets to stabilize and gradually recover as uncertainty recedes.

Geopolitical

The conflict in Iran has been a bit of a roller coaster ride for the markets, and oil prices have been extremely volatile throughout the process. This conflict is behaving similarly as an energy tax, leading to a variety of cascading economic effects. Although a ceasefire was initiated, it doesn’t resolve the core dispute over the Strait of Hormuz. The US frames it as a full reopening, but Iran’s terms require coordination with its military—meaning it still effectively controls who passes. In practice, Iran appears to be maintaining leverage by limiting traffic and potentially charging transit fees, turning the strait into a managed chokepoint rather than a truly open route.

In the recent talks held by the US and Iran, President Trump said the US had “VERY GOOD AND PRODUCTIVE” conversations and was holding off on strikes. Yet, the sides were unable to reach a definitive agreement. This leaves the ceasefire in a fragile state and Hormuz “essentially closed” to through traffic. In response to no agreement being made, the US is pursuing a naval blockade posture around Hormuz, warning it won’t allow Iran to “blackmail or extort the world,” while simultaneously introducing 50% secondary tariffs on any country supplying weapons to Iran. Very recently, it was announced that Israel and Lebanon reached a 10-day ceasefire agreement, lifting hopes for a break in the Middle East conflict. The US and Iran are reportedly in discussions to prolong their two-week ceasefire set to expire on April 22, with both sides said to be in favor of an extension.

Inflation & Jobs

The inflation story across the latest data releases is being dominated by an energy shock, and the timing is problematic for the Fed. March Consumer Price Index data was up .9% for the month. This sharp acceleration was primarily due to energy. And, the concern is that it may be the best headline inflation number we see for a while if energy prices remains elevated.

Producer-price data is telling a similar story, with the February Producer Price Index rising .7% for the month, primarily due to energy. However, the March data was up .5%, well under the 1.2% consensus estimate, which was a very positive surprise.

"However, the March data was up .5%, well under the 1.2% consensus estimate, which was a very positive surprise.”

The risk is that this energy shock is hitting the same time as the labor market trying to normalize. One key metric that has gained attention is the job openings-to-unemployed ratio, which has fallen below 1x rather quickly; but it is still above long-term averages.

Federal Reserve

Even before the war intensified causing this energy shock, the Fed’s preferred inflation gauge showed that inflation was remaining sticky around 3%, well above the Fed’s 2% target. This isn’t great news for the Fed. Six years into a journey well above target, and now the Fed must evaluate an oil shock on top of inflation that hadn’t fully cooled on its own.

Chair Powell emphasized the uncertainty: “It'll come down to how long the current situation lasts… The economic effects could be bigger. They could be smaller… We just don't know.” The “standard learning,” he said, is to look through energy spikes, but that approach depends on expectations staying anchored — a harder proposition after years of above-target inflation, and with a conflict-driven spike that is already large enough to rattle consumers and markets.

“Six years into a journey well above target, and now the Fed must evaluate an oil shock on top of inflation that hadn’t fully cooled on its own.”

Fed Governor Chris Waller stated, if oil is “at a very high level and it stays high for months on end, then at some point it bleeds through because oil is an input into so many products,” and that’s when “you do have to respond” as it shows up in core inflation. The policy trap is a potential stagflation scenario where the Fed is forced to choose which side is deteriorating faster, inflation or employment. The Fed is surely watching explicitly for stagflation dynamics and would have to figure out which side is getting worse and for how long. At this point, the baseline expectation is now just one cut in December, but it is possible the Fed delivers no cuts this year, and even the uncomfortable possibility that the next move could even be a hike if inflation starts to progress.

Stocks

AI companies just got a wake-up call that the biggest risks aren’t just the AI making mistakes — it’s data security. There were a couple of major events related to this risk. In one case, a hack led to the potential of valuable AI training data being exposed. That’s a big deal because it could give competitors — even other countries — access to cutting-edge tech. In another case, human error led to the leaking of proprietary internal code. The big takeaway: AI companies can’t just “lock things down” and assume they’re safe. A single weak spot — whether it’s a vendor, open-source tool, or human error — can cause major, lasting damage.

For the month of March, equities were generally down regardless of market capitalization. This volatility was surely initiated by the Iran conflict and the cascading effects associated with shocks to energy prices. Foreign equities declined significantly more than US equities in March. This leads to questions around if last year’s foreign equity outperformance is sustainable or will revert back to US dominance in equity prices. With that said, the early days of April have brough swift recovery to broad equity prices. Hope for resolution to the middle east conflict is high, and equity prices have reflected that.

Bonds

The Iran conflict also impacted the bond market, weighing on bond prices as yields have generally risen. The yield on 10-year Treasury notes relative to two-year Treasuries reached the highest difference since the beginning of 2022. This steepening of the yield is primarily driven by concerns over increased government debt issuance.

Longer-term bonds were hit the hardest in March as the surging oil prices and fears of war-related government spending caused a major selloff. Shorter-term bonds were more resilient. Corporate bonds and high yield bonds also experienced declines in March. However, floating rate bank loans posted positive returns for the month. On a year-to-date basis, bonds are generally flat across the board. Yet, over the trailing one year time frame, many bond sectors are hanging on to relatively attractive total returns.

The performance information presented in the asset category section of this report is based on equal-weighted averages of the following Morningstar Categories: US Stocks (US Fund Large Blend, US Fund Mid-Cap Blend, US Fund Small-Blend), Foreign Stocks (US Fund Foreign Large Blend, US Fund Foreign Small/Mid Blend, US Fund Diversified Emerging Mkts), US Bonds (US Fund Intermediate Government, US Fund Inflation-Protected Bond, US Fund Corporate Bond, US Fund High Yield Bond, US Fund Bank Loan), Foreign Bonds (US Fund World Bond, US Fund Emerging Markets Bond), Hard Assets (US Fund Commodities Precious Metals, US Fund Commodities Energy, US Fund Global Real Estate, US Fund Real Estate), Hybrid Assets (US Fund Convertibles, US Fund Preferred Stock).

© 2026 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers is responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees, commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income, and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Economic Shocks

Advisory Alpha — Wed, 18 Mar 2026 19:34:55 +0000

Strengths and Shifts

Recent geopolitical developments in the Middle East have unsettled global markets, particularly energy markets. A series of attacks against key US and Israeli sites, following earlier strikes on Iran that killed several senior leaders, effectively halted marine transportation through the Strait of Hormuz, a narrow waterway connecting the Persian Gulf to the Gulf of Oman along Iran’s southern coast. Oil prices surged as shipping companies struggled to obtain insurance coverage for vessels entering the Strait. Roughly 20% of the world’s oil supply passes through this corridor each year. Beyond energy markets, the disruption also carries broader economic and humanitarian implications, as many countries in this region rely heavily on food imports transported through these waters. There are strong incentives to reopen the Strait quickly, as it would benefit both global energy markets and regional supply chains.

US Treasury Secretary Scott Bessent believes the oil price shock may prove temporary. In addition to releasing oil from strategic reserves and providing US Navy escorts through the Strait, the Treasury Department has floated more unconventional measures to stabilize prices. One proposal involves short-selling oil futures using a specialized US Treasury reserve account as collateral. A short sale involves selling a borrowed asset with the intention of repurchasing it later at a lower price. While government intervention in oil markets would be highly unusual and contains risks, the proposal may reflect the perspective of a policymaker with a background in hedge funds.

Outside of energy markets, equity valuations were tested by an unexpectedly weak employment report. The economy reportedly lost far more jobs in February than economists anticipated, raising concerns that rising unemployment could reduce incomes, spending, and growth. Researchers are now analyzing the data to determine possible causes, ranging from AI displacement to businesses reducing expenses. Despite the surprising jobs data, last year’s GDP figures showed that gains in worker productivity contributed positively to economic growth. Strong productivity helps businesses maintain profits, which in turn supports equity valuations over time.

“Despite the surprising jobs data, last year’s GDP figures showed that gains in worker productivity contributed positively to economic growth. Strong productivity helps businesses maintain profits, which in turn supports equity valuations over time.”

Another development emerged from the judicial branch. Last month, the Supreme Court ruled that several tariffs implemented during President Trump’s administration exceeded the scope of his legal authority. The ruling leaves open questions about the future of previously collected tariff revenues and any replacement tariffs. President Trump indicated that he intends to replace the prior tariffs with temporary flat-rate tariffs, which fall within his authority. However, these replacement tariffs are not expected to fully offset the revenue generated by the original tariffs. As a result, investors may increasingly evaluate the implications for federal borrowing costs, particularly amid increasing fiscal deficits and debt.

In contrast to the caution signaled by increased demand for safe-haven assets, strong corporate profitability suggests that productivity gains, particularly those linked to AI technology, are supporting economic growth and efficiency. For investors, this environment underscores the importance of balanced portfolios that maintain exposure to growth opportunities while incorporating assets that help manage volatility in a changing global landscape.

Geopolitical

The Supreme Court dropped a major legal shock into the middle of the already-turbulent global trade backdrop, striking down the centerpiece of Trump’s blanket “Liberation Day” tariffs. Markets initially treated it as a relief valve, but it quickly became clear the ruling created a new phase of uncertainty, not clarity, because the administration immediately signaled it would rebuild the tariff regime through other statutes. Yet, the next layer of complexity is related to tariff refunds. Companies began filing suits for these refunds and customs is building an electronic refund process.

The big international news is the Iran conflict. Energy costs are the immediate risk because they can hit consumers and inflation quickly. A primary factor is the situation surrounding the Strait of Hormuz, which carries roughly one-fifth of the world’s oil. Crude moved through the psychological threshold of $100 per barrel and is up over 60% since the beginning of the year. This has impacted the global economies in many different ways.

Inflation & Jobs

Quarter 4 GDP was a clear disappointment, with an initial reading of 1.4% annualized growth versus 2.9% expected, and a later revision taking that growth rate down to just 0.7%. Government activity was a major culprit, with federal spending plunging during the quarter, which fits the narrative that the 43-day shutdown did real damage.

Consumer behavior looked less robust than earlier in 2025. In the revised GDP report, consumption slowed relative to Q3, and there was also a notable split in spending patterns where services were still growing faster while goods were flat. This helps explain why parts of inflation remain stubborn.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditures, or PCE index did not give the market the “all clear” as it came in hotter than expected. The recent Consumer Price Index, or CPI data was somewhat calmer, but not a decisive counter-signal. February CPI came in as expected at 0.3% month over month and 2.4% year over year.

The wild card for inflation is energy, and specifically the impacts associated with the Iran conflict. There have been warnings about extreme cost shock scenarios and real disruption risk around shipping lanes and regional infrastructure.

The labor market added a new layer of discomfort. February payrolls reportedly fell by 92,000 jobs, versus expectations for a gain of about 50,000, and revisions cut the prior readings for December and January by a meaningful amount. Unemployment also ticked up to 4.4% and labor force participation slipped to about 62%, which suggests not just fewer hires, but also potential worker discouragement.

“The Fed’s preferred inflation gauge, the Personal Consumption Expenditures, or PCE index did not give the market the “all clear” as it came in hotter than expected.”

Federal Reserve

The Fed story this month is less about a clear “next move” and more about a central bank trying to protect credibility while the data and the geopolitical backdrop keep shifting. After three cuts in late 2025, January was a pause, and the minutes made it clear the committee is trying to stay flexible without looking indecisive. A number of participants worried that cutting further while inflation is still elevated could be misread as a weaker commitment to the 2% goal, and some believed hikes could be appropriate if inflation stays too high.

Employment data is also critical. If job creation and low unemployment look real, holding rates and waiting for more inflation progress becomes the cleaner choice. If the labor market data is revised down and the softness reasserts itself, the case for another cut reopens.

“A number of participants worried that cutting further while inflation is still elevated could be misread as a weaker commitment to the 2% goal, and some believed hikes could be appropriate if inflation stays too high.”

The Supreme Court decision overturning a large share of last year’s tariffs creates a moving target in terms of inflation impact. This could ease some near-term goods price pressure, but the administration’s intent to reimpose tariffs through other legal paths keeps businesses and markets in a holding pattern. The implication is that policy will lean more heavily on the underlying inflation trend and labor market signal, because the tariff channel is too politically and legally fluid to anchor a clean forecast.

And, yet another factor is the Iran conflict. Even if the Fed believes an energy spike is transitory, it has to worry about second-round effects through expectations, and about the political pressure that inevitably rises when inflation reaccelerates.

Stocks

Markets are being forced to reprice a geopolitical shock that sits right on top of the world’s most important energy corridor, and the initial reaction has been a familiar sequence: energy prices up, stocks down, and yields up. A major uncertainty is the potential duration of this conflict. A severe shock can be absorbed if it is short-lived, but a medium-duration shock becomes an economic one.

Where this gets especially tricky is that the same oil impulse that lifts inflation expectations can also delay or reduce the amount of rate relief investors have been counting on. One final consideration is valuation levels. Highly-valued, or expensive markets, do not need a full-blown recession to wobble, they just need a catalyst that widens the range of outcomes.

Although all equities declined as a result of the Iran conflict, small caps experienced more volatility. Also, foreign stocks have declined more than US stocks since the beginning of the conflict, with emerging market stocks experiencing the most losses. This is in part because many Asian and European economies are far more dependent on energy imports than the US. Further, while the US stock markets are bolstered by global tech giants with strong balance sheets, foreign indices are often more concentrated in sectors directly threatened by the conflict.

Bonds

The Iran conflict also impacted the bond market, forcing it right back into a two-handed outlook: inflation risk up front, and growth risk down the road. Initially, treasuries logged their biggest monthly rally in a year, with the 10-year yield falling below 4% for the first time since November as investors leaned on Treasuries as the most liquid “flight-to-quality” asset. Subsequently, yields shot higher with inflation fears taking center stage, which has pressured bond prices.

Longer-term bonds were hit the hardest as the surging oil prices and fears of war-related government spending caused a major selloff. Shorter-term bonds were more resilient. However, yields for shorter-term bonds generally rose more than yields for long-term bonds. This resulted in a flattening in the yield curve. As a reminder though, although long-term bond yields rose less than short-term bond yields, the price declines for long-term bonds were more significant due to their heightened sensitivity to interest rate changes.

Corporate bonds, specifically high yield bonds saw prices fall as "yield spreads" widened, meaning investors demanded much higher returns to hold riskier corporate debt compared to government debt. Similarly, foreign bonds were also negatively impacted, specifically those countries that have a greater energy import dependence.

Gold, Growth, and a World in Transition

Advisory Alpha — Tue, 17 Feb 2026 13:43:25 +0000

Strengths and Shifts

The start of 2026 has seen a dramatic shift in the geopolitical landscape following the US. The early weeks of 2026 have seen unusually strong demand for gold and other physical metals as investors respond to a weakening US dollar and heightened global uncertainty. Gold has advanced steadily, while silver, supported by its essential role in electronics, semiconductors, and medical technologies, has risen sharply over the past year. Beyond these precious safe havens, industrial metals such as copper and aluminum remain in high demand, reflecting long-term supply constraints and the rapid construction and electrification of AI infrastructure.

This aggressive move toward hard assets is occurring alongside meaningful changes in the global economic landscape. Discussions at the World Economic Forum in Davos highlighted a growing shift away from the cooperative, rules-based framework that has defined global trade for decades. Countries are increasingly prioritizing domestic resilience, supply-chain security, and strategic industries. In response, several governments, including Canada, are pivoting, prioritizing economic reforms to reduce taxes, spur business investment, increase defense spending, and rebuild infrastructure.

In the United States, global uncertainty is intersecting with the possibility of a shift in monetary policy leadership. The nomination of Kevin Warsh to succeed Jerome Powell has raised expectations for a different policy mix, one that may allow lower short-term interest rates while placing greater emphasis on reducing the Federal Reserve’s balance sheet. Efforts to shrink the balance sheet would increase the supply of Treasury securities available to investors, contributing to upward pressure on longer-term interest rates.

“Discussions at the World Economic Forum in Davos highlighted a growing shift away from the cooperative, rules-based framework that has defined global trade for decades. Countries are increasingly prioritizing domestic resilience, supply-chain security, and strategic industries.”

These developments have resulted in a steeper yield curve, with higher long-term rates reflecting concerns about structural inflation and rising government borrowing needs. Against this backdrop, some investors have increased allocations to metals as a diversification tool, particularly as confidence in traditional foreign reserve currencies wanes.

Despite these macroeconomic and geopolitical concerns, US equity markets have remained resilient. Corporate earnings have now grown at a double-digit pace for five consecutive quarters, and profit margins are at record-breaking levels. This strength has been most evident among companies with significant international revenue exposure, which have benefited from the weaker dollar and continued global demand. Ironically, the same weakening dollar that alarms currency investors is providing a significant tailwind for these globally positioned companies.

In contrast to the caution signaled by increased demand for safe-haven assets, strong corporate profitability suggests that productivity gains, particularly those linked to artificial intelligence, are supporting economic growth and efficiency. For investors, this environment underscores the importance of balanced portfolios that maintain exposure to growth opportunities while incorporating assets that help manage volatility in a changing global landscape.

Geopolitical

The geopolitical backdrop this month is being driven by a more confrontational US posture on trade and security.

President Trump continued a rapid-fire pattern of new tariff threats aimed not only at strategic competitors but also at key allies, including Canada and Mexico. Ongoing tariff threats, even when partially reversed, show that trade uncertainty is becoming a lasting feature of the policy landscape. The bigger economic impact may stem not from any single tariff rate, but from the unpredictable pattern of announcements, exemptions, and retaliation risks.

The Greenland episode highlighted how US–Europe tensions can quickly impact markets and investments. While rhetoric caused brief market swings, the main effects were seen in capital flows, with expectations of deeper US involvement boosting local assets. The focus on Arctic security, minerals, and limiting Chinese influence underscores how the US is using security frameworks to shape economic and strategic outcomes.

Finally, China’s record near 1.2 trillion dollar trade surplus at the end of 2025 is increasingly shaping global markets. Large private-sector overseas investments and potential yuan shifts are making global liquidity more sensitive and creating risks of broader market volatility.

Inflation & Jobs

By late 2025, labor market data weakened significantly, with payroll growth slowing sharply and later revisions showing conditions were even softer than initially reported. But in early 2026, there were early signs that the labor market might be stabilizing. The unemployment rate unexpectedly dipped to 4.4%.

On the inflation front, data has generally been moving in the right direction, but not in a straight line. Core and headline inflation readings eased into late 2025 and continued to cool at the start of 2026. Specifically, core Consumer Price Index data recently fell to 2.6%. Producer prices ran hot on the surface but looked more modest after revisions and energy effects.

This inflation and jobs environment puts the Fed in a difficult position. The job market is cooling but not collapsing, which is hard to interpret. Monetary policy decisions hinge on whether the slowdown is temporary or more lasting. Yet, the recent cooling inflation allows the Fed to keep focus on the labor market fragility, but are still striving for a return to the 2 percent target.

The future of inflation and employment is further complicated because consumer spending has remained strong. However, that strength may be uneven across households; specifically, consumer spending is stronger for higher-income consumers relative to lower-income consumers. This can make overall growth appear healthier than many people’s actual experience. As a result, inflation may not decline quickly, even if hiring remains weak.

Key items to watch are whether hiring continues to stabilize or reverts downward, and whether inflation progress stays broad-based or individualized by specific categories. One general risk or question is, are we in an economy that feels weaker than the growth data implies?

Federal Reserve

After cutting rates three times last fall, the Fed held the policy rate steady in January at the 3.5% to 3.75% range. This was a clear signal that the Fed is not eager to ease again immediately and believes current policy is close to “neutral”. It seems that additional rate changes will require a clear deterioration in inflation or employment data.

Inflation has been slowly trending in the right direction, but the Fed is still watching for a tariff-related inflation bump in early 2026. Further, the labor market has cooled but not cracked, which is exactly the scenario that produces a policy “holding pattern.”

There are a few uncommon forces uniquely impacting the Fed as of late. First, divisions within the Fed are becoming more visible, with recent rate decisions drawing dissent from governors who favored another cut. This unusual disagreement makes the Fed’s policy path less predictable and the markets more sensitive to each new data release.

“The Justice Department probe and public disputes have intensified questions about Fed independence, prompting strong support from major central banks worldwide.”

Second, there is an escalating clash between President Trump and Chair Powell, which has grown into a global concern. The Justice Department probe and public disputes have intensified questions about Fed independence, prompting strong support from major central banks worldwide.

Third, Powell’s term is ending in May, and therefore, the Fed leadership transition has become a key policy factor. The nomination of Kevin Warsh has added uncertainty, as investors weigh his recent dovish tone against his historically hawkish reputation.

All that to say, there is elevated uncertainty around future monetary policy, but for now, the likely path is a data-dependent and patient Fed.

Stocks

Certain equity market trends have seemingly shifted since the beginning of the year. US large cap markets have been the dominant stock market segment for years, but have lost some momentum in 2026. Both the mid-cap and small-cap markets have outpaced the large-cap market by a notable margin since the beginning of the year. It is unclear if this will be a sustained trend where wider market breadth begins to deliver total return for equity investors.

The foreign equity markets have continued strong outperformance relative to most US markets as we enter 2026. Further, the trailing one year total returns of most foreign equity markets are sizably larger than those delivered from the US markets. After such a long period of underperformance, foreign market outperformance relative to US stocks may have room to continue.

The overall commodity and energy markets have started the year strong as well. The gold markets in particular have been a major driver of returns in this space. Yet, overall, these diversifying asset classes can offer helpful risk and return characteristics when trying to diversify broader equity market portfolios.

Bonds

President Trump’s housing affordability plan aims to lower mortgage rates by having Fannie Mae and Freddie Mac buy $200B in mortgage-backed securities, compressing the spread between 30-year mortgage rates and 10-year Treasuries. Early results show some effectiveness, with spreads narrowing and average mortgage rates dipping below 6%, but the long-term impact remains uncertain. Overall, the policy highlights how balance-sheet demand can influence mortgage spreads as well as the mortgage backed segment of the bond market. Over the last year, mortgage-backed bonds have posted total returns of around 8.5%, outpacing almost every other major bond segment over that time.

Overall, the bond market has been quite flat since the beginning of the year. However, over the last year, the broad bond market has posted respectable returns. Corporate bonds, both high quality and high yield, have been some of the leading bond sectors over this time with total returns in the 7% to 9% range. Foreign fixed income has also performed very well over this time with returns in the 8% to 12% range. These returns have rivaled the long-term return expectations for certain equity markets.

As we progress through 2026, we believe that approaching certain bonds with caution is warranted. However, bonds are pivotal from an asset allocation standpoint for many investors; it is important to remain selective and intentional within the fixed income markets.

Venezuela

Advisory Alpha — Wed, 14 Jan 2026 14:09:41 +0000

Strengths and Shifts

The start of 2026 has seen a dramatic shift in the geopolitical landscape following the US military intervention in Venezuela. The capture of Nicolás Maduro, who now faces narco-terrorism charges in New York, represents a significant implementation of the Monroe Doctrine, aimed at reasserting US influence in the Western Hemisphere. While these headlines are historic, their immediate impact on global capital markets remains surprisingly contained.

Historically, global markets have generally looked through geopolitical volatility to the underlying supply and demand. Because Venezuela currently accounts for only 0.1% of global GDP and approximately 1.0% of global oil production, the transmission to broader markets has been limited. US equity markets have remained resilient, and these events have not seemed to significantly impact the long-term stock market outlook.

“Because Venezuela currently accounts for only 0.1% of global GDP and approximately 1.0% of global oil production, the transmission to broader markets has been limited. US equity markets have remained resilient, and these events have not seemed to significantly impact the long-term stock market outlook.”

Venezuela’s infrastructure is currently in severe disrepair and neglect following years of mismanagement, corruption, and declining production. The scale of the challenge is immense, with experts suggesting that fully monetizing the nation's oil reserves will likely require hundreds of billions of dollars and several decades of sustained investment. The oil industry, which has seen production plummet, faces significant technical and financial hurdles.

The physical decay of infrastructure is compounded by a broken legal and commercial framework. Industry leaders have described the current environment as uninvestable due to the lack of durable investment protections and the need for fundamental changes to oil laws. Major energy companies are unlikely to commit the necessary funds for reconstruction until there is bipartisan policy support from both the US and Venezuelan governments, alongside assurances regarding contract sanctity and the repayment of historical debts.

The most significant opportunity lies in Venezuela's proven oil reserves, which rank as the world’s largest and account for nearly one-fifth of the global total. Unlike other regions where the challenge is discovery, industry leaders note that in Venezuela, where the resource is already known, the opportunity lies in developing it into a product that will remain in high demand for decades. US Gulf Coast refiners are uniquely positioned to benefit because their facilities were originally designed to process Venezuelan heavy crude. Access to this feedstock could widen the differential between various oil types, significantly improving refiner margins.

Despite historic geopolitical headlines, markets have remained calm, reflecting Venezuela’s limited near-term impact on global growth and energy supply. Investor focus remains on fundamentals, with US equities showing resilience. Longer term, Venezuela’s vast oil reserves represent meaningful optionality if governance improves, particularly for US Gulf Coast refiners positioned to benefit from heavy crude, supporting a constructive and forward-looking investment outlook.

Economy

The broad economy in aggregate has continued to experience a general expansion. Economic growth is quite strong, with the third‑quarter GDP accelerating to a 4.3% annualized pace, the fastest in two years. This has been driven by robust consumer spending, a rebound in exports, business investment in equipment and AI, and higher government spending.

Core retail sales jumped .8% in October, suggesting underlying consumption remained firm even as headline retail sales were flat. Yet this strength is not broadly shared and is unfolding against a backdrop of elevated inflation, high tariffs, and political shocks that are reshaping trade and energy flows.

The economy is increasingly “K-shaped,” with affluent consumers and large firms continuing to drive growth through strong spending and investment, while lower- and middle-income households and small businesses have been pulling back under rising cost pressures.

Tariffs seem to have now evolved to a central structural feature of the US economic landscape, and not a temporary shock. Average applied US tariff rates have surged from roughly 2.5% at the start of 2025 to the mid‑teens by year‑end, the highest in at least eight decades.

Venezuela has been the center of attention following the US-led capture and removal of President Maduro. The US actions to import Venezuelan crude and sideline China have signaled a more assertive US posture. Still, with Venezuela producing well under 1% of global oil supply, the implications are less about near-term oil markets and more about the evolving geopolitical risk backdrop.

Inflation & Jobs

November data painted a picture of cooling inflation approaching the Fed’s target, alongside easing momentum in the labor market—though not to an overly concerning degree.

Headline CPI slipped to 2.7% year over year, below expectations of 3.1%. A key theme across the inflation coverage is that the November CPI print looks better on paper than it actually “feels. Much of the downside surprise appears tied to government-shutdown‑related distortions. Specifically, there was no data collection in October and only limited collection in November, which means many month‑to‑month comparisons could not be calculated.

On the labor side, the unemployment rate climbed to 4.6% but then recently fell to 4.4%. New jobs were less than expected in December and were revised lower for both October and November. The story is of a market that has shifted from “hot” to “low‑hire, low‑fire” and now risks cracking. Under the surface, stress is building: part‑time work for economic reasons has risen sharply, long‑term unemployment remains elevated versus a year ago, and younger workers are facing a tough entry environment as employers hold headcount flat. Some people feel that the labor market is under pressure with large downside risks, whereas others argue this may be a mature, slower‑growth expansion rather than the clear start of a recession.

“November data painted a picture of cooling inflation approaching the Fed’s target, alongside easing momentum in the labor market—though not to an overly concerning degree.”

The key focal points over the next few months will be whether CPI normalizes higher from the recent distorted prints, how far unemployment drifts above the Fed’s projected peak, and whether consumer and business sentiment weaken further as the “low‑hire, low‑fire” environment persists.

Federal Reserve

The Fed enters 2026 with unusually high internal division and an uncomfortable tradeoff between a softening labor market and inflation that is still above its 2% target. Throughout 2025, policymakers struggled to balance these twin mandates, leading to a string of contentious meetings and three rate cuts. This split reflects genuine disagreement over whether the bigger risk now is weaker hiring or inflation that could prove sticky, especially given distortions in recent inflation data.

The Fed story going into 2026 is one of heightened uncertainty rather than a clean pivot. The committee is signaling a cautious bias toward further cuts over time, but wants more reliable data after the shutdown‑driven gaps in inflation reporting and amid a cooling labor market.

Looking ahead, Powell’s term expires in May, and Trump has signaled he will replace him. The choice of a new Fed chair is widely seen as one of the most consequential events of 2026. This is because the next leader will have to manage both internal divisions and intense pressure from the administration for lower rates, all while maintaining credibility with markets.

“The choice of a new Fed chair is widely seen as one of the most consequential events of 2026.”

Internationally, the broader global central‑bank backdrop has shifted from aggressive tightening to the largest wave of easing since the financial crisis. In 2025, nine of the central banks overseeing the most‑traded currencies, including the Fed, ECB, and Bank of England, delivered a combined 8.5% cumulative rate cut. Emerging‑market central banks have also been aggressively easing after getting inflation under control earlier and more proactively than many developed markets.

Stocks

Risk assets such as stocks have delivered another year of strong gains, even as the dollar weakened and some speculative areas like crypto underperformed. This underscores a market still responsive to liquidity and rate expectations but wary of policy and geopolitical shocks.

In the US markets, large-cap stocks ended the year far higher than small-cap stocks. Small caps have continuously been troubled by a higher interest rate environment. The transition to lower rates may create momentum for small caps.

Foreign markets had a tremendous total return in 2025, with most broad markets posting returns north of 30%. This has, in part, been supported by strengthening foreign currencies relative to the US Dollar.

Bonds

The Treasury market quietly delivered its best year since 2020 as weaker labor market data, tariff‑related uncertainty, and a six‑week government shutdown all weighed on growth expectations and influenced the Fed to cut rates.

Under the surface, the move was more nuanced than a simple “rally across the board.” The biggest yield declines came in shorter maturities, while the 30‑year yield actually finished the year slightly higher.

10‑year Treasuries traded in their tightest range since 2021. This pattern may reflect a market that expects policy rates to move lower over time but remains wary about long‑term fiscal risks, tariff implications, and the administration’s pressure to ease interest rates.

Corporate bonds have also performed well for the year, with high-quality, low-quality, and floating-rate bonds generating total returns in the 7% to 9% ranged. Even foreign bonds generated strong returns over this time, with emerging market debt posting total returns of approximately 13% for the year!

Heading into 2026, we believe that approaching bonds with some caution is warranted. With the Fed’s cutting cycle well underway, it is difficult to know how much of the future rate-cutting potential is already factored into current bond prices.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers is responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees, commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

New Booms, Old Lessons

Advisory Alpha — Tue, 16 Dec 2025 20:25:54 +0000

Strengths and Shifts

The modern AI economy effectively began in 2022, when researchers learned how to combine large-scale computing with human feedback models. This breakthrough transformed raw language models into useful, interactive systems and unlocked the technologies behind today’s AI platforms. It also triggered an unexpected side effect: a nationwide wave of data-center development. Running this new class of models requires enormous amounts of hardware, real estate, and electricity—costs that many towns across America are only now confronting as datacenter proposals arrive at their doorsteps.

Economists now estimate that AI-related capital investment accounted for roughly one-third to one-half of total U.S. GDP growth in 2025, a remarkable share for a technology that is barely three years old. This investment cycle has helped create new categories of wealth and lifted equity markets to record highs. For years, gains were concentrated in mega-cap technology firms, but more recently, broader swaths of the market—particularly small-cap stocks—have strengthened, suggesting AI’s benefits are beginning to diffuse through the broader economy rather than remain isolated in one sector.

The scale of private investment behind this boom is enormous. Private lenders, venture funds, and private equity firms have spent years building pipelines of AI-related deals, financing everything from semiconductor manufacturing to frontier-model development to edge inference software. Many of these deals are innovative and complex—sometimes making AI companies simultaneously the investment, customer, and commercial partner of the same financial sponsor. While this creativity fuels rapid growth, it also introduces systemic chokepoints: if one link in the chain fails, the damage can cascade through the entire ecosystem.

History offers plenty of warnings. The United States has lived through multiple periods of explosive infrastructure investment—canals, railroads, the telegraph, electrification, nuclear power, fiber optics, and the early internet. Each created lasting value, but each also produced overbuilding, speculation, and financial panic. With AI, critics worry the pattern may be repeating. Markets have grown concentrated and expensive, and in recent months, investors have turned more cautious. Stock indexes have pulled back from their highs, and credit spreads in bond markets have widened, signaling rising concern about risk.

“The United States has lived through multiple periods of explosive infrastructure investment—canals, railroads, the telegraph, electrification, nuclear power, fiber optics, and the early internet. Each created lasting value, but each also produced overbuilding, speculation, and financial panic.”

At the same time, AI companies face intense global competition, extraordinary cash-burning rates, and a private-equity market that may be stretching leverage too far. Investors expect returns on the capital they provide, and each of these conditions threatens to lower future profitability. If growth slows or financing tightens, today’s AI buildout—like the great booms of previous centuries— could reveal pockets of overinvestment.

The AI revolution is real, but so are the financial cycles that accompany it. The challenge for investors now is to benefit from the long-term transformation without repeating the mistakes that often come with revolutionary new technologies.

Tariffs

One of the major outstanding uncertainties around tariffs is the pending US Supreme Court decision on the legality of President Trump’s tariffs. This represents a fundamental constitutional question: can the president unilaterally levy tariffs, or does that authority rest with Congress? Several major US companies have filed lawsuits seeking refunds in anticipation of a ruling against the tariffs—a decision that could force the administration to repay billions of dollars in collected duties.

Amid this uncertainty, the administration has been actively negotiating trade deals. Our Treasury Secretary confirmed that China is “on track to keep every part” of the trade agreement struck last month, with President Trump stating that China agreed to increase both the speed and size of agricultural purchases. Targeted trade relief measures have also been put in place across several countries, including South Korea, the UK, and Brazil.

The administration has also floated the possibility of issuing $2,000 “tariff dividend” checks to middle and lower-income Americans and the concept of reducing or eliminating personal income tax entirely, all funded by tariff revenue. Both the practicality and legality of these strategies have been questioned by lawmakers across the political spectrum.

We need to carefully watch how the trade landscape evolves—the Supreme Court decision looms large, consumer affordability concerns are impacting the political environment, and the push to reduce food prices through selective tariff relief suggests the administration may have a growing concern about inflation. These global trade implications will continue to be top of mind coming into the new year.

Inflation & Jobs

President Trump ramped up his affordability messaging, telling Americans that inflation was “almost at the sweet spot” and claiming we have “normalized it” around his stated 1% target. Yet, conversely, Consumer Price Index data showed inflation stubbornly holds at an annual rate of 3%—well above both Trump’s 1% claim and the Federal Reserve’s 2% target.

“Consumer Price Index data showed inflation stubbornly holds at an annual rate of 3%—well above both Trump’s 1% claim and the Federal Reserve’s 2% target.”

On the inflation front, the Producer Price Index surged 0.3% in September, driven primarily by a 3.5% jump in energy costs. This suggested that producers were passing through some tariff costs, and that further inflationary pressure may still be ahead as businesses continue facing higher input prices. The Fed’s preferred inflation measure, the Personal Consumption Expenditures index, provided a somewhat encouraging result, showing only a slight uptick to 2.8% annually.

The September jobs report was also delayed by the government shutdown and was just recently released, revealing a labor market at an inflection point. The economy added 119,000 jobs, which was more than double the expectation. However, beneath the headline number, warning signs emerged as unemployment crept up to 4.4%, the highest level since October 2021. This data left the Fed in a challenging position—balancing persistent inflation concerns against mounting evidence of labor market deterioration.

Finally, retail sales data for September was delayed and recently released. It showed that American consumers pulled back. Headline retail sales climbed just 0.2%, missing the 0.4% expectation and decelerating from August’s 0.6% gain.

Federal Reserve

The Fed Chair succession process heated up considerably as of late. Fed Governor Chris Waller confirmed his recent meeting with the Treasury Secretary, stating, “I think they are looking for someone who has merit, experience, and knows what they are doing in the job, and I think I fit that”. President Trump began final interviews with a variety of candidates and made it clear that his test for the next Fed chair is “whether they want to lower rates immediately”. Powell’s term ends in May, and an announcement of the next Fed chair is expected early next year.

The final Fed meeting of the year delivered a divided decision that underscores the challenging path ahead for our country’s monetary policy. The central bank cut rates by a quarter point for the third time this year, bringing the benchmark rate to a range of 3.5% to 3.75%. The decision drew dissents in opposing directions—marking the first time since 2019 that three Fed officials voted against a policy action.

“The decision drew dissents in opposing directions—marking the first time since 2019 that three Fed officials voted against a policy action.”

The Fed revised its expected GDP growth higher to 2.3% for 2026, versus 1.8% previously, while inflation is expected to fall to 2.5% next year from the current 3% level. The Fed expects unemployment to tick down to 4.4%. As we navigate this environment, we’re focused on the interplay between resilient economic growth, stubborn inflation, leadership transition risks at the Fed, and the persistent disconnect between short-term policy rates and long-term market rates.

Stocks

There continues to be a lot of attention surrounding AI’s impact on the investing landscape. Nvidia’s latest earnings underscored just how powerful demand for AI infrastructure has become, with revenue and guidance far exceeding expectations and data-center sales booming. While geopolitical tensions—particularly in China—created some drag, Nvidia is successfully redirecting growth toward new global markets. More broadly, the entire AI ecosystem is entering a capital-intensive phase: tech giants and utilities are borrowing trillions to build the data-center capacity needed for AI, pushing corporate debt costs higher and raising questions about long-term returns. For investors, the opportunity in AI is enormous, but so are the risks—especially the uncertainty around profitability timelines and the growing concentration of financial exposure in a few major players.

Overall, the equity markets performed well in November. In the US markets, small caps bounced and outperformed large caps. But on a year-to-date basis, large caps display strong double-digit returns, whereas small caps are generally down over that time period. This illustrates the toll interest rate markets have taken on small caps.

Internationally, stocks have had a blockbuster year with returns around 30% across most broad foreign equity markets. Throughout this year, the global trade landscape has radically changed the dynamics of global stock market returns. Generally speaking, the broad all-cap foreign equity market returns are in close parity to those of similar US markets, over the trailing three year period.

Bonds

There has been a persistent rise in long-term Treasury yields despite the Fed’s easing campaign. Since the Fed began cutting rates in September, peeling back a total of 1.5 percentage points, we’ve seen the 30-year Treasury yield hover near 4.8% and the 10-year around 4.2%—both rising over the past month and surpassing where they stood at the start of the easing cycle.

Bond markets are seemingly reacting to a global realignment on trade and uncertain expectations around American governance. Higher yields reflect investor demand for greater compensation given higher deficits and mounting policy risks, and potentially some market disagreement with continued Fed cuts while inflation remains elevated. A more optimistic interpretation could be that this divergence in short and long-term yields is signaling confidence that an economic slowdown will be averted.

Most bond sectors posted modest, nominal gains in November. Overall, most bond sectors stand to post respectable returns for the year, except for the longer-term segment of the market. Most long-term bonds have struggled to post any meaningful returns for the year, sitting at near-flat total return levels. The bond market is starting to look a bit better over 3-year averages as well, with the exception of long-term bonds.

© Advisory Alpha. Registration with the SEC or a state does not constitute an endorsement of the firm by regulators, nor does it indicate that the adviser has attained a particular level of skill or ability. This content is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investing involves risk, including the potential loss of principal. No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. All investment strategies involve risk and have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially affect the performance of your portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark. Investors should carefully consider the investment objectives, risks, fees, and expenses before investing. Any financial services firms referenced in this material do not provide tax or legal advice. Please consult with your tax or legal professional regarding specific issues prior to making a tax or legal decision. The performance information presented in the asset category section of this report is based on equal-weighted averages of the following Morningstar Categories: US Stocks (US Fund Large Blend, US Fund Mid-Cap Blend, US Fund Small-Blend), Foreign Stocks (US Fund Foreign Large Blend, US Fund Foreign Small/Mid Blend, US Fund Diversified Emerging Mkts), US Bonds (US Fund Intermediate Government, US Fund Inflation-Protected Bond, US Fund Corporate Bond, US Fund High Yield Bond, US Fund Bank Loan), Foreign Bonds (US Fund World Bond, US Fund Emerging Markets Bond), Hard Assets (US Fund Commodities Precious Metals, US Fund Commodities Energy, US Fund Global Real Estate, US Fund Real Estate), Hybrid Assets (US Fund Convertibles, US Fund Preferred Stock). © 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers is responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees, commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results. Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income, and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Earning Doubles

Advisory Alpha — Tue, 18 Nov 2025 18:38:14 +0000

Strengths and Shifts

In 1965, Gordon Moore predicted that the number of transistors on a microchip would double approximately every two years. To date, his prediction has proven reliable, allowing technology firms to innovate in unimaginable ways. Likewise, investing possesses its own doubling rule, called the rule of 72. The rule estimates the number of years it takes for an investment to double by dividing 72 by the investment’s expected return.

Although investment returns rarely double as fast as Moore’s prediction for computer switches, recent experience with stock markets parallels it. Investing in US stocks over the past quarter-century essentially quintupled invested wealth. In addition, new classes of technologically advanced companies emerged, all of which benefited from Moore’s law and went on to obtain market dominance. As a result, corporations now earn revenues and incomes that were once unthinkable to investors.

“Year-over-year earnings growth rate could finish in the low double digits, marking the fourth consecutive quarter of double-digit growth.”

Success in the stock market as of late has been primarily driven by corporate earnings that companies distribute as dividends. At the moment, listed companies on the stock market are reporting their third-quarter financial results. If current trends sustain, the year-over-year earnings growth rate could finish in the low double digits, marking the fourth consecutive quarter of double-digit growth. These growth rates closely mirror the experiences of 2021, which ended exceptionally well for investors.

Among the leaders of growth are financial, technology, and consumer stocks. Business fundamentals in these designated sectors have strengthened lately, driving earnings higher. Unfortunately, growth in the communications sector has contracted following a significant negative earnings surprise from one social media service. Yet, third-quarter earnings surprises remain extremely impressive despite some outliers, with about 80% of those that reported beating expectations.

Still, there is a stock market price to acquire record-breaking earnings, and that cost has risen significantly since the tariff setbacks in April. The price-to-earnings ratio is a widely used multiple that investors use to gauge the cost of earnings. That price multiple has recently risen to 23 times earnings ($23 price tag per $1 of income), exceeding its dot-com level and matching its previous quarter-century high set in 2020. Even though the multiple can’t be relied on as signaling an overvalued market. It serves as a reminder that stocks aren’t necessarily cheap by historical standards.

Finally, investors have rewarded companies with positive beats less and punished those with negative surprises more than usual as of late. This has caused some to argue that the market seems tired. Despite the exponential parallels between technology and investing, stock returns are not tangible products like microchips. Therefore, their doubling rates are extremely sensitive and variable to economic change, unlike technology, which follows a more deterministic path.

Tariffs

The major tariff-related news recently centered around negotiations with China. Recent attention has been given to China’s “nuclear option”, stemming from its control over the global supply of active pharmaceutical ingredients. This dependence creates a significant national security risk for the US, as hundreds of US medicines rely on key ingredients solely sourced from China.

Treasury Secretary Bessent stated that a “very successful framework” has been discussed, and the leaders of each country held a meeting to progress it. Both sides agreed to a one-year truce aimed at reducing trade tensions. A clear headline for markets was a tariff reduction by the US, and in return, China agreed to halt its plans to restrict the export of rare earth minerals for at least one year. The limited agreement also included China resuming purchases of “tremendous amounts” of US soybeans.

Similarly, trade tensions with Mexico experienced a temporary reprieve as the Mexican President announced that the US had agreed to extend the deadline for reaching a trade deal for several weeks.

These developments help remove a key downside risk to the near-term outlook and provide markets with a measure of stability heading into next year. However, analysts quickly noted that these developments are “fragile” given the risk of policy missteps and unresolved underlying issues.

Conversely, the Trump administration recently terminated all trade negotiations with Canada based on a Canadian advertisement that used the voice of former President Ronald Reagan to criticize Trump’s tariff policies. Trump further claimed that Canada was attempting to illegally influence the Supreme Court case challenging his tariff authority.

Inflation & Jobs

The record-setting, 43-day federal shutdown finally ended when President Trump signed a bill in the evening of November 12th. White House officials warned that economic reports delayed by the shutdown, including data on inflation and the October job market, “will be permanently impaired” and likely never released. This lack of hard data immediately complicated investor sentiment regarding the Federal Reserve’s path forward. The sentiment has now changed quite drastically, leading to expectations for no further rate cuts in December.

“Even after a historic shutdown, key inflation data held steady, offering investors clearer footing as markets look ahead.”

Further, the shutdown prevented the publication of official September and October jobs and inflation reports as a result of the “data drought” from the Bureau of Labor Statistics (BLS) and the Labor Department. This has created new uncertainty around the condition of our country’s labor markets, which has been further complicated by certain non-governmental information indicating recent sizeable increases in layoffs.

Despite the shutdown, the September Consumer Price Index (CPI) report showed inflation stubbornly holding firm near 3%. While this reading was slightly below economists’ expectations for a 3.1% rise, it marked the highest reading since May and remains above the 12-month average of 2.7%.

Concurrently, the Social Security Administration announced a 2.8% cost-of-living adjustment (COLA) for 2026. Yet, some are concerned that a COLA of 3% will not be enough to keep pace with rising costs for necessities. Furthermore, the looming financial health of the program is a consideration that needs to be addressed.

Federal Reserve

The central bank was forced to make critical policy decisions under some challenging conditions: a severe data blackout and mounting liquidity stress.

Despite most data being delayed, one vital piece of information that was published was the September CPI, which was released late due to legal requirements for calculating Social Security benefits. Since the CPI showed inflation cooling slightly, it helped keep the Fed on course for a rate cut, as many analysts believed the disinflation trend was intact.

“Despite challenging conditions, the Fed stayed on course, delivering another rate cut and signaling a steadier path ahead.”

Following the decision, Powell immediately tempered expectations for future easing, stating that a further reduction in the policy rate at the December meeting is “not a foregone conclusion, far from it”. This caution, based on upside risks to inflation and downside risks to employment, was perceived by markets as a “hawkish cut”.

The weeks following the rate cut were defined by a stark divergence in opinion among policymakers regarding the path forward. Ultimately, Powell summarized the Fed’s cautious approach given the missing data with the metaphor: “What do you do when you are driving in the fog? You slow down”.

On a related note, the Treasury has continued “quantitative tightening”, which means it is intentionally not repurchasing bonds that are maturing off of its balance sheet. This has put increased liquidity into the market. The Secured Overnight Financing Rate, or SOFR, recently rose above the Fed’s target rate, which is an unusual development. Ultimately, this raised questions about how much longer the Fed could continue unwinding its balance sheet without draining essential liquidity and potentially reducing the effectiveness of rate cuts.

Stocks

Powell provided some interesting context surrounding the equity market’s primary driver: the AI Boom. Powell stated that this AI Boom is fundamentally different from the dotcom bubble of the late 1990s. He distinguished the current environment by pointing out that many of the highly valued AI companies have profit, unlike many companies during the dotcom era. Powell noted that AI investments, particularly in chips and data centers, are a major source of economic growth. However, he also acknowledged the capital intensity of the sector, noting that certain high-valued startups are currently burning cash.

Overall, equity markets have been continually hit with uncertainty as of late, including the lingering trade tensions with China, the ongoing US government shutdown, caution surrounding the AI rally, and monetary policy uncertainty. Despite this uncertainty, equity markets remained strong in October, supported by the prospect of a deal with China as well as strong corporate earnings. Yet, stock prices came under pressure more recently in the first couple of weeks of November.

In October, large caps outperformed smaller caps both in the US and internationally. Emerging market stocks had a great month of October. Over the last several years, US large caps and most major international stock market indexes have displayed very strong returns relative to US small caps.

Bonds

The recent Fed rate cut decision and the uncertainty surrounding future monetary policy have created an uncertain backdrop for the bond markets. Despite this monetary policy uncertainty, bonds displayed fairly respectable returns for the month of October. Long-term bonds generally outperformed shorter-term bonds by a significant margin. Over the last five years, long-term bonds have still rather significantly underperformed short-term bonds.

Lower quality bonds, such as floating rate debt and high yield bonds, are still generating attractive total returns. Over a three and five year period, these types of bonds are the only US bond sectors displaying near double digit total annualized returns.

Internationally, there has been quite a divergence between developed countries and emerging market bonds. Although both of these bond segments have provided respectable year-to-date returns, emerging market bonds have outperformed rather significantly on a year-to-date basis, but even more so over the last few years.

© Advisory Alpha. Registration with the SEC or state does not constitute an endorsement of the firm by regulators, nor does it indicate that the adviser has attained a particular level of skill or ability. This content is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investing involves risk, including the potential loss of principal. No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. All investment strategies involve risk and have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially affect the performance of your portfolio. There are no assurances that a portfolio will match or outperform any particular benchmark. Investors should carefully consider the investment objectives, risks, fees, and expenses before investing. Any financial services firms referenced in this material do not provide tax or legal advice. Please consult with your tax or legal professional regarding specific issues prior to making a tax or legal decision.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

The Investing Cycle

Advisory Alpha — Tue, 14 Oct 2025 13:16:50 +0000

Strengths and Shifts

Advances in computing, semiconductors, medicine, and energy have been key drivers of the current business cycle. Many of the world’s largest corporations are investing heavily in new technologies to unlock future profitability. These capital investments have not only fueled innovation but also supported the broader stock market and corporate earnings. It is working circularly throughout markets, where one company’s capital expense is another’s revenue. Add robust consumer spending to it, and record-breaking corporate profits emerge for market investors to share. Except, it’s not so simple. Investors are asked to pay more for future earnings now than in other periods of the past. Paying above-average prices for earnings can sometimes diminish investment returns later.

Beneath the surface, the market has been shaped by a wave of mergers, acquisitions, and strategic partnerships. Investors often interpret institutional risk-taking as a positive signal, with deal-making by banks and private equity investors helping to support valuations in public equity markets. Recent announcements highlight the scale of capital investments in the market. In September, news broke that Oracle, OpenAI, and SoftBank plan to build five new data centers. In addition, NVIDIA has committed billions to supply GPUs to OpenAI and Intel, and Meta has pledged billions for computing services hosted by CoreWeave. Even the US government is participating, targeting significant investments in Intel and companies involved in rare earths and advanced materials.

Yet even at these historically high levels of investment, risks remain. Many professionals recall the internet build-out before the dot-com crash, when a handful of global leaders over-invested in fiber-optic networks to meet anticipated demand. Bandwidth, however, developed more slowly than expected, leaving many overextended businesses bankrupt.

“Investors often interpret institutional risk-taking as a positive signal, with deal-making by banks and private equity investors helping to support valuations in public equity markets.”

The current investment cycle may evoke similar concerns. Physical and operational constraints are significant to turn multi-billion-dollar infrastructure investments into sustainable income streams. For one, the energy required to power Oracle’s planned data centers could match the power needs of four nuclear power plants or supply electricity to three to four million homes. Moreover, Oracle intends to finance the build-out with public debt, thereby adding to its already leveraged balance sheet. Funding these projects through debt adds balance sheet risk and complexity to corporations, highlighting both infrastructure limitations and company-specific vulnerabilities in this new era of ambitious spending.

Corporate and government spending on next-generation technologies shows no signs of slowing, and neither do the stakes. Profits are high, valuations are stretched, and infrastructure plans are massive, evoking echoes of past cycles where optimism ran ahead of reality. Investors are chasing transformative growth, but the risks, from operational bottlenecks to balance sheet strains, can’t be ignored. In today’s market, the winners will be those who can distinguish bold innovation and positive change from those who overextend and over-invest.

Tariffs

August marked the first whole month of receipts from the new “reciprocal” tariffs, totaling nearly $29.5 billion in customs duties, which was a record month. This heavy revenue collection came as a sticky August inflation report led many economists to attribute rising consumer prices to the upward pressure from these duties.

High-level trade negotiations between the US and China were a primary focus and led to critical progress following a call between President Trump and China’s President. This discussion also included the topic of a potential sale of TikTok’s US operations. The result was a framework deal to preserve the US operations of the app, which would be acquired by a consortium including Oracle.

Looking forward, the trade landscape faces significant legal and strategic shifts. The Supreme Court is poised to review the legal challenge to Trump’s broad “reciprocal” tariffs, specifically those imposed using the 1977 International Emergency Economic Powers Act. Arguments are scheduled for November 5, and a decision is possible by year-end.

Since an adverse ruling could potentially force the administration to refund about half of the recent tariff revenues, the White House is already shifting its strategy. The administration is refocusing on the more legally secure authority granted by Section 232 of the Trade Expansion Act, which targets sectors on national security grounds. This pivot has led to a slew of sector-specific tariff promises.

Globally, the World Trade Organization (WTO) delivered a contrasting outlook. While global trade was resilient in the first half of 2025, boosted significantly by AI-related trade, the WTO sharply downgraded its forecast for 2026. This downgrade is based on an expected slowdown as the full impact of US tariffs is fully in effect.

Economy

Although the recent government shutdown is concerning, it had previously occurred back in 2018. These types of shutdowns affect many things, but one area critically important to investors is the potential impacts on the Bureau of Labor Statistics (BLS), a key source of data.

President Trump repeatedly promised to use the shutdown to make “irreversible” cuts, saying, “A lot of good can come from shutdowns.” By the second day, the White House was actively working to identify thousands of federal jobs to cut permanently, targeting agencies deemed “a waste of the taxpayer dollar”.

Shifting to the topic of inflation, the August Producer Price Index unexpectedly fell by 0.1% from July. This deceleration in wholesale inflation was partly attributed to narrower profit margins at retailers and wholesalers, suggesting that businesses might be absorbing the cost of tariffs rather than passing them entirely on to consumers. Further, the Consumer Price Index (CPI) showed core prices (excluding food and energy) holding steady at 3.1% year-over-year in August.

Finally, the labor markets have continued to soften quite dramatically. The economy added only 22,000 jobs in August, well below the forecast of 75,000. Furthermore, the job growth for June was revised significantly lower, now ending in negative territory. This resulted in three months of slowing job growth. In addition, the Labor Department also reported that employers had added 911,000 fewer jobs than initially reported in the 12 months ending in March. And finally, this softening trend was underscored by the unemployment rate, which ticked up to 4.3% in August, reaching its highest level since October 2021.

Federal Reserve

The Fed proceeded with its first rate cut of 2025, marking a significant policy shift. The decision to cut rates was driven primarily by a deteriorating labor market, despite persistent inflation, shifting the balance of risks away from inflation toward maximizing employment.

“The Fed’s move to begin easing rates has opened the door to new opportunities for growth and improved market liquidity.”

Fed Chair Powell emphasized that the period of “waiting and watching” was over, noting that the central bank now faced a “difficult situation” in which its dual mandate of price stability and maximum employment was in tension. Powell stated that “there are no risk-free paths now”.

Looking ahead, estimates are for two more rate cuts this year, up from the estimates in June. The rate decision intensified political scrutiny and deep divisions within the Fed. Newly confirmed Fed Governor Miran dissented from the quarter-point cut, arguing in favor of an even larger half-point reduction. Treasury Secretary Bessent echoed this sentiment, expressing surprise that Powell had not signaled a clearer agenda for aggressive cuts, suggesting a destination of “at least 100 to 150 basis points” before year-end.

Stocks

President Donald Trump publicly advocated for the US to do away with quarterly earnings reports, urging securities regulators to switch to a six-month reporting period instead. Quarterly reporting has been mandated by the Securities and Exchange Commission since 1970. Trump argued that this change would “save money” and “allow managers to focus on properly running their companies”. Supporters of the shift claim that quarterly reporting is costly and time-consuming, and that it forces executives to focus too much on short-term targets rather than long-term planning. However, opponents argue that quarterly reports provide investors with valuable financial updates and essential context to gauge a company’s health and prospects, noting that the original 1970 policy shift was designed to reduce “information asymmetry” that occurred when companies could hide shrinking profits during economic downturns.

Overall, stocks continue to perform well. In the US, large cap stocks outperformed smaller cap stocks for the month of September; the return differential since the beginning of the year is quite significant.

Foreign stocks continue the outperformance relative to US stocks. On a year-to-date basis, foreign stocks have roughly twice the return of US stocks. This strong foreign stock performance has now brought the three year average annual returns to similar levels to those of US stocks.

Bonds

Bonds had a strong month in September. The Fed rate cut helped bring down the yields in the short-term end of the yield curve. However, the yield curve is now currently in a strange shape, where short term rates are higher than intermediate term rates, but the long-term rates are the highest of all maturities. Overall, it appears the yield curve is starting to normalize, where longer maturities deliver greater yields, but that process is taking some time.

Long-term bonds outperformed shorter-term bonds for the month of September. Yet still, longer-term bonds have rather unattractive returns over the one, three, and five-year periods.

High yield (low quality) bonds and bank loans continue to generate attractive returns, bringing the one and three year average returns into the 7% and nearly 11% range, respectively. These types of bonds continue to serve as the highest return bond sectors.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Strengths and Shifts

Advisory Alpha — Mon, 15 Sep 2025 17:26:11 +0000

Strengths and Shifts

The economy has grown significantly since the last time it experienced a recession. Household incomes and financial savings stand at all-time highs, underscoring the strength of the past few years. Even faced with formidable headwinds-including wars, inflation, bank failures, and trade tensions-this expansion has endured and, more recently, even accelerated. Upgrades to GDP, fueled by improved capital investment and consumer spending, have reinforced this resilience. Moreover, forecasting models run by the Dallas and Atlanta Fed now project faster growth than earlier this year.

Linked to the recent success is the US stock market, particularly its large-cap segment. Broadly diversified large-caps are on pace to end 2025 with double-digit returns. If sustained, 2025 would mark the third consecutive year of such performance—an uncommon streak historically, often associated with periods of major technological transformation. While innovation plays a role, record-high corporate profits remain the dominant driver. Strong earnings continue to fund dividends and share buybacks, both of which have been critical in sustaining equity valuations.

Interestingly, foreign equities have staged a comeback this year, outperforming many U.S. benchmarks. The driver has been a weaker US dollar, which boosts the value of overseas assets when translated back into dollars. Combined with positive returns across many international markets, U.S. investors have enjoyed a “double benefit”—from both local equity appreciation and favorable currency movements.

Still, this year’s weaker US dollar seems anomalous with accelerating growth. An expanding economy should attract capital and strengthen its currency. Therefore, there must be other drivers. The other candidates could be inflation above global averages or expectations for decreased interest rates. The interest rate expectation fits nicely, assuming the Federal Reserve reduces interest rates used in monetary policy decisions soon. Probabilistically, inflation risks make less sense since the Fed would try to avoid rate reductions in those scenarios.

“At present, the weight of evidence still points toward ongoing economic expansion—and for now, corporate and market behavior remains firmly aligned with growth.”

Yet, not all data paints a rosy picture. Recent consecutive downward revisions to job reports by the Bureau of Labor Statistics hint at a softer labor market, and the Fed’s urgency to consider rate cuts may be another signal of caution. Employment trends will likely draw closer scrutiny in the months ahead.

Even so, long-term investors should avoid overreacting. Historically, modest upticks in unemployment have not been reliable signals to abandon equity markets. Businesses and capital markets tend to price risks early and adapt quickly. At present, the weight of evidence still points toward ongoing economic expansion—and for now, corporate and market behavior remains firmly aligned with growth.

Tariffs

Second quarter GDP had a surprise upward revision to 3.3%, and surged due to a significant decrease in imports due to increased tariffs, which subtracts from GDP. However, this strength was met with a deteriorating assessment of the labor market by consumers, with perceptions of job availability being the weakest in over four years.

Treasury Secretary Bessent was optimistic about the tariff revenue stream, stating it could reach “well over $500 billion a year,” significantly reducing federal deficits.

Trump explicitly warned of an “economic war” if the Russia-Ukraine conflict isn’t resolved, citing “very serious” consequences. We saw this manifest in the doubled, 50% US tariffs imposed on imports from India due to its continued purchases of Russian oil. Conversely, Mexico is reportedly considering new tariffs on China, potentially distancing itself from Asia and strengthening ties with the US ahead of critical trade negotiations.

China’s President convened a landmark summit, strategically embracing Russian and Indian leaders in a clear move to build an alternative to the US-led world order. While President Trump dismissed these gatherings as “largely performative”, other observers view them as a “meaningful shift” in diplomatic power, highlighting a growing front against US trade policies.

Adding to the complexity, President Trump’s tariff regime recently faced significant legal challenges. A federal appeals court struck down most of his tariffs, ruling that he exceeded his legal authority under the International Emergency Economic Powers Act and that Congress holds the exclusive power to impose taxes and duties.

While the tariffs remain in place pending further appeal, Trump strongly criticized the ruling as “highly partisan” and warned of a “total disaster” if tariffs were removed, indicating he would seek an immediate hearing from the Supreme Court.

Inflation & Jobs

Recent inflation data has been complex and generally mixed. July Producer Price Index (PPI) surged 0.7% over the prior month, well ahead of forecasts. This may suggest that businesses could pass some of these higher costs onto consumers. This came just days after the July Consumer Price Index (CPI) data showed inflation pressures were broadly in line with forecasts. Yet, the Fed’s preferred inflation gauge, the “core” Personal Consumption Expenditures (PCE) index, matched expectations but experienced its biggest annual rise since February.

Employment data continues to take focus. The July Job Openings and Labor Turnover Survey (JOLTS) report showed that the ratio of job vacancies to unemployed workers fell below 1 for the first time since April 2021, with job openings falling below expectations. Yet, economists suggested the labor market was slowing substantially but not signaling an imminent downturn.

Then came the crucial August jobs report, which revealed a dramatic slowdown, with fewer than expected jobs added and the unemployment rate rising to 4.3%. Further, June’s data was revised to show a loss of 13,000 jobs, the first outright monthly decline since 2020.

Finally, significant government revisions to employment data revealed that the US economy employed approximately 900,000 fewer people than originally reported for the 12 months ending March 2025. This indicates the labor market was much weaker and downshifting long before the summer.

This stark new evidence quickly fueled critics of government data collection, who argued President Trump inherited a weaker-than-expected economy and that Fed Chair Powell “has officially run out of excuses and must cut the rates now.”

Federal Reserve

Fed Chair Jerome Powell, in his highly anticipated speech at Jackson Hole, opened the door to a September rate cut, stating that the “baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”. This announcement sent US stocks soaring and significantly increased market expectations for a rate cut at the next Fed meeting. This, combined with previous downward revisions to job growth, has all but sealed expectations for a September rate cut.

“A September rate cut looks nearly certain, but political pressure and legal challenges leave the Fed’s independence in the spotlight.”

President Trump recently escalated his criticism of the Fed as he announced his intention to terminate Fed Governor Lisa Cook, citing allegations of mortgage fraud. Cook, a Biden appointee, swiftly challenged this move as “unprecedented and illegal,” filing a lawsuit against Trump, the Board of Governors, and Chair Powell. This historic attempt—the first time a president has tried to fire a sitting Fed governor—has raised concerns about the central bank’s autonomy. If successful, Trump could secure a majority of his appointees on the seven-member Board of Governors. Some believe that such political involvement could erode the Fed’s credibility, impacting the American economy and consumers.

The White House has consistently criticized Powell for not acting sooner, arguing that delaying cuts hurts businesses and households. While a 25 basis-point cut in September appears almost guaranteed, the ongoing legal battle surrounding Governor Cook and the broader political pressure on the Fed mean that the path of monetary policy, and the institution’s independence, will remain a critical focus for investors in the months to come.

Stocks

A fascinating and somewhat unprecedented development in the relationship between the US government and corporate America has evolved, particularly concerning Intel. The US government recently converted $11 billion in grants into a 9.9% equity stake, marking an extraordinary intervention. Intel expressed uncertainty about whether other government entities might seek to convert existing grants into equity or if future grants could be jeopardized. There is also a risk that this move could harm Intel’s international sales, especially given that 76% of its revenue last year came from outside the United States. President Trump expressed his satisfaction with the deal, claiming the government paid “ZERO” for Intel and stating his desire to make similar “lucrative deals” that make the “USA RICHER, AND RICHER”.

From a broader perspective, stocks had another great month in August, continuing the rally. Small caps had a strong month, returning over 7%, far outpacing large caps. However, the trailing one and three year returns for large caps far exceed those of small caps. Foreign stocks also performed well, generally in line with US stocks on average across large and small caps.

With the high expectation of a Fed rate cut, some believe this monetary policy shift will fuel further stock market acceleration. However, stock markets tend to forecast these changes quite well and adjust prices accordingly. Still, plenty of uncertainty exists with tariffs and the economy, which will continue to impact stock prices.

Bonds

Bonds were influenced heavily by the sudden, near-certain expectation of a rate cut by the Fed as a result of Powell’s Jackson Hole speech and the recent labor market data. Ultimately, there has been a divergence between the short-end of the yield curve, gaining from a potential dovish shift by the Fed, and the long-end of the yield curve, which has climbed due to the “inflationary potential” of a less independent Fed and higher borrowing costs.

Overall, bonds performed well in August. Although shorter-term bonds outperformed longer-term bonds, corporate and high-yield bonds also performed well. Yields across corporate, high yield, and longer-term bonds are likely quite attractive to many investors. Yet, the trailing total returns for many bond segments are still quite unattractive due to the rising rate cycle from the recent past, which is still fresh in the minds of many investors.

The ongoing tension between immediate rate-cut expectations and long-term inflation and fiscal concerns means that the divergence between short- and long-term yields will likely remain a key feature of the bond market for some time.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Growth Persists

Advisory Alpha — Thu, 14 Aug 2025 20:00:11 +0000

Investors closely watch quarterly GDP reports to evaluate the strength and direction of the economy. These reports influence market sentiment, shape expectations for Federal Reserve policy, and offer valuable context for corporate earnings forecasts and portfolio decisions. The second-quarter GDP data showed a significant upside surprise, with the U.S. economy growing at an annualized rate of 3.0% from April through June. This represented a strong rebound from the -0.5% decline in Q1, which was mainly caused by one-time tariff-related inventory distortions. The latest reading greatly surpassed the 2.4% growth predicted by experts, indicating stronger underlying demand and economic resilience.

The 3.0% increase reflects real GDP growth, meaning it excludes inflation. On a nominal basis—which accounts for the effects of price changes—the economy grew at a 5.0% annualized rate, indicating a 2.0% annualized increase in the GDP price index, a broad inflation measure. This mix of solid real growth and moderate inflation could give the Federal Reserve more flexibility to consider future interest rate cuts.

“The combination of strong consumption, declining inventories, and manageable inflation supports continued confidence in economic growth heading into the second half of the year.”

Several factors contributed to the second-quarter surge. A sharp decline in imports was one of the main reasons for the improved growth rate. Businesses had front-loaded inventory purchases in the first quarter before tariffs took effect, causing an unusual spike in imports and a corresponding drag on Q1 GDP, since imports subtract from total output. In Q2, as imports decreased, GDP received a mechanical boost. Private inventories also dropped significantly, as firms sold off stockpiles accumulated before the tariffs rather than replenishing them—behavior that could reverse in future quarters and support additional growth.

Most importantly, consumer spending remained robust, especially in durable goods like motor vehicles and in services such as food, travel, and entertainment. Since household consumption makes up nearly 70% of total GDP, its continued strength is a key indicator of economic health. Other parts of GDP—including business investment, government spending, and exports—were relatively steady and had little impact on the quarter’s overall growth.

Taken together, the data suggest an economy that is both stable and expanding. The combination of strong consumption, declining inventories, and manageable inflation supports continued confidence in economic growth heading into the second half of the year.

Tariffs

In early July, the International Monetary Fund (IMF) announced it was closely monitoring global trade and emphasized the elevated uncertainty. The IMF urged countries to work constructively for a stable trade environment, noting that while economic activity had seen a temporary increase due to front-loading purchases, higher tariffs would bite harder in the second half of the year. The US dollar has depreciated recently, down roughly 7% this year. This could pose an increased risk of inflation, leading companies to pass on tariff costs to consumers and businesses.

The US trade deficit narrowed significantly in June to a two-year low, mainly due to a sharp drop in consumer goods imports. This contributed to the second quarter US GDP rebounding with a stronger-than-expected 3% growth rate. However, underlying indicators suggested weakening activity, particularly in the services sector, which showed signs of softening due to tariff policy uncertainty and rising input costs.

The Trump administration has finalized trade deals with many countries, including Vietnam, Japan, South Korea, Malaysia, and many others, but global trade uncertainty is still highly elevated. A major deal with the European Union was announced on July 28, which includes a 15% tariff on most EU goods, commitments from the EU to purchase US energy products and invest in the US, and reduced EU tariffs on some US goods.

One other major tariff-related headline was that President Trump recently signed an executive order extending the tariff truce with China for another 90 days, pushing negotiations into the fall, and stated that the US was “getting very close to a deal” with China.

The US government collected nearly $30 billion in tariff revenue in July, according to the Treasury Department, which is a major jump of around 240% compared to July of last year. At this rate, the imposed tariffs are expected to generate a substantial amount of revenue for the government in the coming years. However, there is clearly still major uncertainty around the potential negative effects of tariffs on the US economy and consumer prices.

Inflation & Jobs

The inflationary environment and data releases over the last couple of months have been in a transitional state due to the evolving global trade landscape. Heading into July, investor hopes for an immediate rate cut were largely quashed as inflation showed an uptick in the June data. Both the Consumer Price Index (CPI) and the Fed’s preferred inflation measure, the Personal Consumption Expenditures, or PCE index, came in hotter than expected in June. Fed Chair Jerome Powell acknowledged that “higher tariffs have begun to show through more clearly to prices of some goods,” though the overall impact on the economy and broader inflation remained uncertain.

As we moved through July, the latest inflation data presented an increasingly complex picture. Headline CPI was slightly less than expected, remaining at 2.7% annually. However, Core CPI was slightly greater than expected on an annualized basis. Although certain categories were clearly impacted by inflationary pressures, the market reacted very positively to these results. Following the July CPI report, investors placed a 90% probability on a .25% Fed rate cut in September.

Although inflation has been a major focus recently, the latest job market data release caused quite a spectacle. The latest jobs data revealed much weaker-than-expected payrolls added in July, but the major news was a significant and abnormal downward revision to the May and June numbers.

President Trump further escalated the situation by firing the commissioner of the Bureau of Labor Statistics (BLS), whom he accused of “faking” numbers. He then nominated a new commissioner, stating he “will ensure that the Numbers released are HONEST and ACCURATE”. This move has drawn sharp criticism from economists and former BLS leaders, who warn it undermines the independence and integrity of federal statistical systems.

Federal Reserve

There is still much uncertainty plaguing the economy, jobs, and inflation, which could lead the Fed to a situation where it needs to reduce interest rates quite dramatically. This isn’t the best outcome for a variety of reasons, and it would surely make the Fed’s job more difficult.

President Trump has been consistently pressuring Powell, repeatedly calling for lower interest rates to stimulate the economy. This pressure intensified with calls for Powell’s resignation and scrutiny of the Fed’s $2.5 billion headquarters renovation, which Trump and his allies have criticized as mismanaged, costly, and potentially involving fraud.

“By holding rates steady and emphasizing data-driven decisions, the Fed is signaling its commitment to stability while keeping future options open.”

Despite the ongoing pressure from the White House, the Fed has remained steadfast in its approach. At its July meeting, the Fed held interest rates steady for the fifth consecutive time, maintaining the benchmark rate in the range of 4.25%-4.5%. Notably, two Fed governors dissented from the decision, advocating for a quarter-percentage-point cut, marking the first time two governors have dissented simultaneously in over three decades.

Fed Chair Powell emphasized that no decisions have been made about a September cut, stating that more time and data are needed to assess the full impact of tariffs on inflation and the economy. He reiterated the Fed’s commitment to keeping inflation under control, asserting that acting too soon could risk inflation not being fully fixed. Yet, with the recent job data and revisions, the market is now expecting a rate cut in the next Fed meeting.

Stocks

Stocks had another great month in July, continuing the rally. The job market data, specifically the downward revisions, negatively impacted markets, but stocks still had positive returns for the month. Further, leading into August, stocks have accelerated based in part on the belief that the Fed will reduce rates quite soon based on the latest CPI release. Although the impacts of tariffs are not fully known, the markets seem to be gaining clarity and confidence in the global trade landscape. Markets don’t deal well with uncertainty, so any form of clarity on this topic will likely be a good thing for stocks.

US large cap stocks continued to outperform small caps for the month of July, which widened the year-to-date return gap between the two groups to approximately 12%. Small caps are down for the year and over the trailing one-year period, whereas large caps have posted solid returns over those time frames.

Foreign stocks had mixed results for the month of July; emerging market stocks were positive, whereas most other foreign stock segments declined. Foreign stocks still have a commanding lead over US stocks since the beginning of the year and over a trailing one-year basis. Even three-year average returns are now generally in the same range for US and foreign stocks.

Investors are keeping a keen eye on job and inflation data, trying to gain further clarity on what the Fed’s rate cut cycle may look like. Although there is no shortage of uncertainty for stocks, rate cuts will surely have an impact on the global equity markets.

Bonds

Bonds have swung in multiple directions since the beginning of July. Yields largely increased in the month of July, which generally negatively impacted bond prices. However, bond yields and prices pivoted due to the job market data and the renewed expectation of rate cuts. This caused yields to begin falling. Short-term bond yields have declined more than long-term bond yields, which has led to a steepening of the yield curve. Short-term yields, particularly those on 2-year notes, are highly sensitive to expectations about the Fed’s short-term monetary policy.

The difference in yields between an investment grade corporate bond and a similar-maturity treasury bond is defined as a spread. Investment grade spreads generally widened in early July, influenced by trade tensions and a more uncertain economic outlook. As the market became more optimistic about potential Federal Reserve interest rate cuts, investment grade spreads tightened. Total return for these higher quality corporate bonds has been approximately 4.7% over the last year, which is about .7% higher than treasury bonds of a similar maturity.

High yield, or low-quality bonds continue to be some of the highest-performing bond sectors over the last year, with total returns over 8%. These bonds are still generating interest, or yield of around 7%.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Evaluating Policy Shifts

Advisory Alpha — Wed, 16 Jul 2025 15:21:34 +0000

The One Big Beautiful Bill (OBBB), long a Republican policy goal, officially became federal law on July 4, 2025. In late June, House Speaker Mike Johnson vowed to send the finalized legislation to President Trump before Independence Day, after the Senate passed its version. He delivered on that promise. The bill narrowly passed the Republican-controlled House with a vote of 218–214. Only two Republicans joined all 212 Democrats in opposition, underscoring the political strength of both President Trump and Speaker Johnson within their party.

The new law is expected to provide a short- to medium-term boost to economic growth. One of its central pro-growth features is the permanent full expensing of most business investments in tangible assets. This allows companies to deduct the entire cost of qualified investments from taxable income in the year they’re made, freeing up capital and incentivizing new spending across industries.

Another major provision is a broad reduction in marginal income tax rates for individuals and families. The top rate for high earners will remain at 37%, while middle and lower income households may realize modest cuts in their marginal tax brackets. In addition, the law increases the standard deduction and child tax credit, providing further support to working families and expanding disposable income.

These tax changes are designed to encourage labor force participation, stimulate consumer demand, and support private-sector investment—all key ingredients for stronger GDP growth.

Despite its growth ambitions, the OBBB carries a substantial fiscal cost. One Congressional Budget Office (CBO) estimate the law will increase federal deficits by an average of $340 billion annually, adding roughly $3.4 trillion to the national debt over the next decade.

Critics warn that these unfunded provisions may ultimately undermine the economic benefits they’re meant to create. Rising deficits could lead to higher interest rates, greater debt service costs, and long-term crowding out of private investment. Some economists argue that rather than stimulating sustainable growth, the bill could place further strain on the U.S. dollar and global investor confidence in U.S. fiscal policy.

“The new law is expected to provide a short- to medium-term boost to economic growth and support private-sector investment.”

Markets are already watching how the OBBB affects inflation, interest rates, and capital flows. In the near term, the combination of tax stimulus and ongoing trade tensions may prompt some investors to diversify globally or shift toward inflation-hedging strategies.

Still, inflation dynamics depend on more than fiscal deficits. Structural forces like technological innovation, demographic shifts, and labor market policy will also shape price pressures over the long run. If productivity continues to rise and incentives support workforce participation, inflation may remain in check, even amid rising debt.

Tariffs

There have been almost daily developments with many of our major trading partners, including China, Mexico, Japan, Canada, and the European Union. While the administration initially targeted July 9 for trade deals to avoid stricter “Liberation Day” tariffs, there have been mixed signals regarding extensions for countries negotiating in “good faith”. Treasury Secretary Scott Bessent’s goal is to complete the balance of the most important trade talks by Labor Day.

The impact of tariffs on the US economy and global trade is becoming increasingly evident, presenting a complex picture of both fiscal benefits and economic shifts. In the first quarter, our deficit surged to a record high of over $450 billion, driven primarily by businesses “front-loading” imports to avoid President Trump’s new tariffs. This deficit now represents around 6% of gross domestic product, the highest since 2006. While the initial import flood has reportedly subsided, if the deficit were to continue, it could pose a long-term risk to the dollar’s “safe haven” status.

Retail sales in May declined by 0.9%, attributed in part to the end of the tariff “front-loading”. The data suggests overall consumption remains healthy for now, but is raising concerns that the clear impact of tariffs on prices hasn’t yet been fully realized.

Some good news on tariffs is the associated revenue for the US government. The Congressional Budget Office projected tariffs could reduce primary deficits by $2.8 trillion over the coming decade, assuming current duties remain constant. This surge has seen tariff revenue increase from about 2% to almost 5% of total federal revenue.

The ripple effects of tariffs are also impacting monetary policy globally. In Europe, three central banks – Switzerland, Sweden, and Norway – cut interest rates recently in response to unpredictable trade policies. This stands in stark contrast to the “wait-and-see” approach in the US, partly due to differing tariff impacts and labor market conditions.

Middle East Tensions

In what quickly became a rapidly escalating situation, President Trump approved US attacks on three Iranian nuclear weapons sites on June 21. The US involvement, specifically with “bunker buster” bombs, was deemed necessary to penetrate deeply buried facilities. This came after weeks of negotiations between the US and Iran over its nuclear program, which were interrupted by Israel’s offensive. Despite the significant strikes, it remains uncertain whether all of Iran’s nuclear program targets were destroyed.

“Markets stabilized quickly thereafter with President Trump announcing a pause in hostilities, offering brief relief amid rising global tensions.”

The financial markets initially responded with significant concern over this deepening Middle East conflict, especially given fears of squeezed oil supply and a broader escalation into full-blown war. But markets stabilized quickly thereafter with President Trump announcing a pause in hostilities.

Despite the recent signs of deescalation and market relief, the situation remains highly fluid and complex. Iran maintains it will not negotiate while the Israeli assault continues. The potential for future escalation remains a key concern, with warnings that Iran could still target US ships and bases in the region. Further, Iran might fully end cooperation with international inspectors and sprint towards a nuclear weapon. Finally, the threat of Iran closing the Strait of Hormuz, a transit point for 20% of the world’s oil, still looms, which could significantly add to inflationary pressures.

Federal Reserve

The Fed is experiencing intensifying pressure from President Trump to lower interest rates. Trump argues that rate cuts are crucial for bringing down the surging cost of government debt. Treasury figures show there has been a sizable increase in the interest expense paid by the US compared to the prior fiscal year, and it also now outpaces defense spending. Furthermore, a wave of maturing debt by year-end will need to be refinanced at much higher costs than when it was issued, adding to the fiscal challenge.

“Fed Chair Powell maintains a ‘wait and see’ strategy, emphasizing the central bank is well-positioned to pause and assess how tariffs and geopolitical tensions might impact inflation and economic stability.”

Lowering rates without economic justification could backfire by stoking inflation fears and reducing demand for Treasuries. Ultimately, the Fed’s primary mandate is price stability and maximum employment, not addressing or managing the fiscal situation. This is why maintaining independence for the Fed is key to ensure a clear focus on these two stated mandates.

Even within the Fed, there is a divide on the future path of interest rates. Fed Chair Powell maintains a “wait and see” strategy, emphasizing that the central bank is “well-positioned to wait” for more clarity on how President Trump’s tariffs will affect inflation and the broader economy. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, accelerated in May, rising above expectations.

The flip side argument of the “wait and see” approach is the downside risks to employment and the potential signs of fragility in the labor market. Recent economic data reflects this softening, with continuing jobless claims rising as of late and first quarter GDP contracting more than previously reported.

Further, geopolitical tensions in Iran further complicate the outlook. On one hand, oil prices could potentially rise and add to inflationary pressures. On the other hand, this conflict could lead to earlier rate cuts due to potential demand shocks.

Stocks

Overall, stocks had another great month in June, continuing their rally. Initially, equity markets were shaken by the Middle East conflict, but by June 24, had rebounded. This “relief rally” was primarily driven by growing optimism around a fragile US-brokered ceasefire between Israel and Iran, raising hopes for a lasting end to regional hostilities. Tariffs also contributed to uncertainty in the equity markets, but haven’t seemed to slow down strong momentum. Finally, the markets seem hopeful of rate cuts this year as well, which may be part of the reason for strong returns as of late.

US large cap stocks outperformed small caps for the month of June, which widened the year-to-date return gap to approximately 10%. Small caps are down for the year, whereas large caps have posted solid returns.

Foreign markets were up for the month of June, slightly less than comparable US stocks. However, the year-to-date returns for foreign stocks are relatively massive, in the 20% range. Foreign diversification has been a tremendous advantage in the equity markets over the last year, with global trade serving as the catalyst for this new market trend.

There has been no shortage of uncertainty for stocks when considering global trade developments, Federal Reserve action, inflation, employment data, and global conflicts. Yet, the global equity markets have faced this uncertainty very well, demonstrating robust resilience.

Bonds

Short-term bond yields are influenced heavily by the Fed. Because there have been no rate cuts recently, short-term bond rates have stayed fairly consistent since the beginning of the year. Intermediate and long-term bond yields have been somewhat volatile since the beginning of the year for a variety of reasons. One item being closely watched is the growing national debt, which may cause some long-term implications for US bond yields.

Long-term bonds rebounded quite nicely during the month of June, which also helped boost their year-to-date total returns into positive territory. Long-term bond yields currently stand close to 5%, which is a respectable target return for many investors. Intermediate and shorter-term bonds haven’t performed quite as well in June, but have provided much more attractive three and five year average total returns relative to long-term bonds.

Foreign bonds posted respectable returns in June and have actually been some of the best performing bonds since the beginning of the year. Similar to foreign equities, foreign bonds have experienced very strong performance relative to US assets. With that said, current yields of foreign bonds are relatively lower than comparable US bonds.

High yield, or lower quality bonds, continue to generate respectable returns for investors. These are some of the only bond sectors that have generated attractive, longer-term total returns. Further, lower quality bonds are generally providing interest rates in the 7 to 8% range.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

It’s “Big and Beautiful”

Advisory Alpha — Tue, 17 Jun 2025 17:06:29 +0000

The so-called “One Big Beautiful Bill” making its way through Capitol Hill has sparked intense debate, particularly among fiscal conservatives and budget deficit hawks. Supporters promote the bill as a sweeping, comprehensive reconciliation package that aims to consolidate tax cuts, spending reforms, and Medicaid restructuring into a single piece of legislation. By advancing the bill through the budget reconciliation process, backers hope to bypass filibusters and secure passage with simple majorities.

The bill’s initial passage in the House of Representatives in May triggered swift backlash. Surprisingly, one of the President’s own allies—previously a champion of cost-cutting and government efficiency—voiced strong opposition online, calling the bill “ugly,” “disgusting,” and an “abomination.” The President, in response, expressed disappointment and hinted at potential political repercussions for dissenters within his ranks.

At its core, the “Big Beautiful Bill” aims to make the 2017 tax cuts permanent. If Congress does not act, those tax cuts are set to expire, resulting in higher marginal tax rates for millions of Americans. The bill also proposes temporary business tax relief through accelerated depreciation on capital investments, expands funding for border and defense security, eliminates various clean energy incentives, and cuts $1.7 trillion from Medicaid.

According to estimates from the nonpartisan Congressional Budget Office (CBO), the bill would add an extra $300 billion per year to the federal budget, which is already projected to be $1.9 trillion for 2025. Consequently, annual federal deficits are expected to exceed $2.2 trillion for the foreseeable future. If this trend continues, total federal debt could reach $60 trillion by 2035—unless bond markets respond by demanding higher interest rates, effectively limiting the government’s borrowing capacity.

The hope is that new government spending should be balanced by future economic growth. However, if tax cuts expire and growth slows, the overall effect could be more detrimental than beneficial. Adding to the issue is inflation, which has already diminished household wealth. Since 2019, American consumers have lost approximately 20% of their purchasing power, largely due to pandemic-era stimulus and subsequent price increases. In this context, inflation functions as a hidden tax on personal wealth.

“Supporters see the ‘Big Beautiful Bill’ as a bold step toward permanent tax relief, streamlined spending, and stronger national security.”

In May, as the bill progressed to the Senate, a major U.S. credit rating agency downgraded the nation’s debt, citing concerns echoed by fiscal conservatives about long-term deficits, rising interest rates, and persistent U.S. dollar weakness. Nevertheless, some economists argue that the $36 trillion national debt must be viewed in relation to the vast wealth and productive capacity of the United States. From that perspective, a full-blown debt crisis may still be distant.

Tariffs

President Trump’s tariff policies have been the primary driver of recent economic and market volatility, leading to a phenomenon known as the “TACO trade,” an acronym for “Trump Always Chickens Out”. The “trade” refers to investors betting on de-escalation after initial tough talk, a strategy that has recently been somewhat effective in the markets.

Legal challenges are now also adding to global trade complexities and uncertainty. A US trade court recently blocked a variety of the tariffs initially announced on “Liberation Day”, claiming that the President does not have unbound authority to enact such tariffs. A federal appeals court temporarily allowed the tariffs to remain in place the very next day.

There have been periods of truce and tensions in various international trade relations. Specifically, the relationship with China has been back-and-forth with both sides claiming the other violated the agreed upon trade truce. Also, a delay of the 50% tariffs on the European Union is allowing for expedited talks, and the EU agreed to speed up negotiations on key sectors.

The tariffs aim to reduce the trade deficit, and although our deficit narrowed sharply in April, it was due to imports plunging ahead of the new tariffs going into effect. Tariff revenues have significantly increased, topping $22 billion in May alone and totaling over $92 billion since the first of the year. Historically, tariff revenue represented roughly 2% of the government’s revenue, and in recent months it has been about double that number.

Economy & Labor

The economic outlook remains clouded by uncertainty associated with the evolving tariff landscape, magnified by the ongoing legal challenges to tariffs. This is leaving both the market and the Fed awaiting more definitive data before making major moves. The full economic impact of the tariff policies is yet to be fully realized in official data.

Consumer spending, which accounts for over two-thirds of our country’s economic activity, slowed in April. It increased only marginally by 0.2% after a preemptive buying surge in March ahead of the new tariffs.

“Despite global trade uncertainty, the U.S. labor market continues to show resilience, with job gains surpassing expectations and unemployment holding steady.”

The US labor market is currently presenting a mixed and somewhat contradictory picture, with signs of both resilience and softening. In May, more jobs were added relative to expectations, and the unemployment rate held steady at 4.2%. However, the prior month’s job figures were revised downward. Job openings unexpectedly rose in April, indicating that labor demand is not in a bad place. Yet, hiring and quit rates are hovering near decade lows. Employers are appearing to remain cautious, seeking greater clarity on the policy outlook.

A general concern for the recent jobs data is that it likely does not capture the adverse impact of trade policy quite yet. More of those effects are expected to be seen in the July and August reports. Also, the overall cooling trends may suggest that employment and wage growth may be insufficient to completely absorb the impacts of the new global trade environment.

Federal Reserve

The Fed policymakers are not aligned on their beliefs around future monetary policy, and much of the debate is centered on tariff-related inflation; will it be temporary or persistent?

Certain Fed board members are adamant about maintaining current interest rate levels due to concern that inflation caused by tariffs will lead to persistent long-term inflation. The risk is that interest rate cuts could spiral inflation “higher for longer.”

Conversely, other Fed board members, along with President Trump, believe that inflation resulting from tariffs will be temporary. The belief is that a strong job market and progress on inflation will offer additional time to determine how trade negotiations play out. This could potentially allow for rate cuts later this year if inflation continues to make progress toward the Fed’s 2% goal and the job market remains solid. Trump continues to publicly pressure Fed Chair Powell to cut rates through a variety of colorful comments, yet Powell has maintained his stance.

“The Fed policymakers are not aligned on their beliefs around future monetary policy, and much of the debate is centered on tariff-related inflation; will it be temporary or persistent?”

The Fed’s preferred inflation measure, the Personal Consumption Expenditures, or PCE, index rose 2.5% on an annual basis as of April. This was lower than the month prior and a welcome development to show inflation data has not yet been negatively affected by tariffs.

The Fed has not altered its benchmark rates at all in 2025 after reducing them by a full percentage point at the end of 2024, citing uncertainties about Trump’s policies. The Fed’s “dot plot” is a visual representation of each Fed board member’s projections for the future path of rates. The most recent dot plot, from March, implies two quarter-percent rate cuts in 2025. But that reality is uncertain and based on the evolution of trade policy.

Stocks

Stocks have continued to rebound from the year-to-date lows experienced in April. Global equity markets were up around 5% for the month of May, bringing the US large cap markets to positive territory for the year. US small cap stocks had a great month but are still holding on to negative year-to-date returns. Small caps continue to fall under pressures related to tariffs, interest rates, and inflation.

Foreign stocks continue to show tremendous strength relative to the US markets. The international markets have generated similar returns as US stocks for the month of May, but the return gap between these large stock markets on a year-to-date basis is significant, over 15% in most cases. Foreign and US stocks are maintaining generally equivalent three year average returns, which has been quite the comeback for foreign markets.

There are still quite a few unanswered questions related to the future landscape for equity markets. Lingering tariff, inflationary, and elevated interest rate issues could negatively impact stock earnings and future stock prices. Yet, momentum with tax incentives and deregulation could be pro-growth and benefit stock markets. We believe that a proper understanding of these dynamics and refraining from emotionally driven decisions is critical to navigating future portfolio allocations. Our team continues to monitor this environment closely.

Bonds

The 10-year Treasury yield climbed to approximately 4.45% in early June, up from 4% in April. The 30-year Treasury yield surpassed the 5% mark again in late May. Yields have remained elevated for a variety of reasons, but the expanding national debt has emerged as a growing concern. This concern was spurred on by Moody’s downgrade of the US credit rating on May 16. This downgrade underscores concerns that growing debt and deficits could introduce serious challenges ahead. A related concern is that this may cause increases in the interest paid by corporations relative to treasury bonds, known as credit spreads.

Higher yields translate into increased borrowing costs for consumers and businesses, which can slow economic activity. Governments may also face difficulties financing their operations if interest rates become too high. The US is currently rolling a massive amount of debt on a weekly basis.

Bond investors seem to be pulling back from longer-dated Treasuries, partly due to diminishing expectations for rate cuts by the Fed and a lower perceived chance of a recession. It can be challenging for investors to hold long term bonds through the constant price volatility that has been experienced. Another dynamic is that Trump’s new tax bill could lead to larger deficits. This could lead to steeper yield curves, where investors demand greater interest payments for lending to a government with growing debt.

Similar to the equity markets, foreign investments have performed better than similar US assets throughout the tariff-related volatility. Yet, US bonds have still generally outperformed foreign bonds by a large margin on a longer-term basis.

Lower quality bonds, such as high yield bonds and bank loans, had a strong month of May. These bond assets have been some of the best performers for quite some time relative to most bond sectors that have had lackluster performance.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Signals of Strength in a Shifting Economy

Advisory Alpha — Fri, 16 May 2025 17:06:12 +0000

Four times a year, the U.S. Bureau of Economic Analysis (BEA) releases gross domestic product (GDP) estimates, measuring the total monetary value of all goods and services produced within the country. The BEA’s initial estimate for the first quarter of 2025 showed an unexpected contraction in real GDP, which is adjusted for inflation. This indicated a potential slowdown compared to the previous quarter.

GDP is driven by four main components: consumer spending, business investment, government expenditures, and net exports (exports minus imports). While a negative reading often raises concerns, the underlying data tells a more nuanced story. Encouragingly, consumer spending and capital investment, two key pillars of a market-driven economy, posted solid gains. The overall decline was caused by a modest drop in government spending and a sharp rise in imports. Because imports subtract from GDP, this increase is likely tied to recent tariff policy changes and possibly a one-time event, which weighed on the final number.

“A single negative GDP reading doesn’t tell the full story—strong consumer spending and business investment point to an economy that remains fundamentally healthy.”

Importantly, markets did not react with panic. The resilience of consumer demand and business investment suggests underlying economic health. Some investors may view the dip in government spending as a positive development, particularly in light of the federal deficit and today’s elevated interest rate environment. The rise in imports appears to be a temporary distortion rather than a lasting trend.

Looking ahead, pending legislative developments, including reconciliation bills and proposed tax reforms, could further support economic activity. These measures may boost employment and incentivize investment through expanded deductions and credits. It is also worth remembering that the BEA will revise this GDP estimate twice before finalizing it. Future adjustments could potentially reflect modest growth rather than contraction.

Ultimately, GDP is a lagging indicator. It reflects what has already occurred, not what is to come. For investors, the real takeaway is to view such data in context and avoid overreacting to short-term fluctuations in national output.

Tariffs

President Trump’s first 100 days in office have been eventful, to say the least. Tariffs continue to be the major focus and source of uncertainty. Much of the tariffs revealed on Liberation Day have been suspended for a 90 day period. And, although the Trump administration has been articulate that numerous negotiations are in progress, it seems unlikely that these negotiations would conclude within that 90 day period. Yet, the hope is that we start getting more and more clarity.

Trade-related negotiations with China have recently been a major development. Tensions between the US and China had escalated quite rapidly, resulting in tariff levels that were unsustainable and essentially would shut down any trade between the countries. Initially, China made efforts to meet with various countries in an effort to form alliances and discourage those countries from making deals with the US. Many other countries depend on the US in various ways, giving the US substantial leverage in certain negotiations. However, China isn’t in the same position. Yet still, China stands to lose many jobs if this tension isn’t resolved, and America stands to lose access to cheap manufacturing.

Neither China nor the US seemed willing to initiate communications initially. But finally, the countries began discussions and immediately agreed to pause most tariffs for 90 days. Specifically, US tariffs on most Chinese goods will be 30%, and China’s tariffs will drop to 10%. This is down from the over 100% tariffs that were previously in place. The clear message from both countries was that neither side wants a decoupling of trade. This was a major development on the global trade front, positively impacting financial markets and instilling more general confidence.

Another major trade development was the US’s announcement of its first trade deal since Liberation Day with the UK. Although the US will maintain a 10% baseline tariff on the country, there will be a reduction in trade barriers on many goods.

The Trump administration has started to focus more attention on a new tax bill, indicating that tariff-related revenue will allow for a reduction in taxes. We will likely see a continued focus on taxes until a new tax bill is finalized.

Economy

The economy has surely been impacted by the global trade developments, and we are now starting to see some of that in the economic data, namely the most recent GDP figures. First quarter GDP declined by 0.3%, the first contraction in 3 years. Interestingly, this was the result of surging imports, which are a reduction in the GDP calculation. This was clearly the result of expedited purchases ahead of the pending tariffs. The remaining components that form the GDP calculation were quite solid, and so it is a bit unusual to experience a negative GDP period within an economic expansion.

It’s important to remember that GDP is a backward-looking measure. It could be interpreted that the economy is resilient and able to withstand the uncertainty from global trade. Yet, the surge in imports could also indicate that consumers are highly concerned about the pending potential tariffs. Another consideration is that consumer confidence has been declining and fell again in April.

Aside from the recent GDP data release, there has been other cautiously optimistic support for a resilient economy. The International Monetary Fund recently released its outlook and expects tariffs to weaken the global economy but not cause a global recession. Further, the Trump administration is starting to focus more on deregulation and tax cuts with the goal of bolstering economic growth.

Monetary Policy

Powell’s consistent message in the wake of tariffs has been that the Fed needs to wait for greater clarity before continuing rate cuts. Some believed and hoped that the Fed might swoop in with lower rates to save the markets, but Powell was quite clear that this is not in the cards. He stated that markets are operating properly, and as one would expect given the unique trade-related developments and associated uncertainty.

Powell believes that global trade tensions could give rise to higher inflation and slower economic growth, which could pose some challenges for our country’s future monetary policy decisions. The Fed’s two priorities are inflation and employment, and these goals could come into conflict given the global trade developments. But the Fed has been clear that price stability is necessary for sustainable employment. There is still much dialogue around whether tariff-related inflation will prove to be transitory or longer-term. Certainly, that will be impacted by the outcome of the numerous trade deals currently being negotiated.

“While economic uncertainty has increased, the Fed noted that the economy continues to expand at a solid pace, with a strong job market and inflation only somewhat elevated.”

April Consumer Price Index data was just released and was below expectations and lower than the prior month. This was one of the lowest CPI readings in years and a welcome development in the wake of the global trade uncertainty. With that said, this likely won’t impact the Fed’s decision making process since much of the tariff-related pressure has likely not yet shown up in the inflationary data.

The labor markets softened in March, with job openings hovering near a four-year low. Yet in April, jobs data came in stronger than expected. This employment data isn’t conclusively positive or negative, so again, it likely won’t impact the Fed’s current stance.

As expected, the Fed held interest rates for the third meeting in a row, commenting that economic uncertainty has increased further yet continues to expand at a solid pace. The Fed also commented that it feels the job market is solid and that inflation is somewhat elevated.

One of the more publicized developments related to the Fed is Trump’s increasingly pointed criticism of Powell. Trump has recently made a series of public comments about Powell. It is abundantly clear that Trump believes Powell has been too slow to cut rates. Trump is also clearly eager to replace Powell in May of 2026.

Stocks

Stocks welcomed a series of positive developments recently, leading to a swift rebound from the lows experienced in early April. Two key announcements related to global trade were the US-China tariff pause and America’s first trade deal since Liberation Day. Further, employment and inflationary data were better than expected, which helped give stocks more confidence. Finally, Trump’s increasingly aggressive criticism of Powell led some to believe that Trump was striving to remove Powell prior to his term. This caused a spike in stock market volatility, but Trump later clarified that he did not have this intention, which calmed markets. Overall, the environment for stocks seems to be on a good trajectory, but surely faces more uncertainty.

Foreign stocks continue to show tremendous strength relative to the US markets. The international markets have been outperforming US stocks by a sizable margin since the beginning of the year. Foreign and US stocks now have generally equivalent three year average returns, which has been quite the comeback for foreign markets.

From a market cap perspective, small caps in the US have underperformed their large cap counterparts. Small caps are generally more susceptible to interest rate pressures, which have been heightened due to the Fed’s pause on interest rate cuts. Interestingly, foreign small caps have generated sizable returns since the beginning of the year.

Bonds

The returns experienced in the broad bond markets were split during the month of April. Treasuries with shorter maturities performed well, whereas longer-term Treasuries declined. Long-term bonds are still trying to claw back returns from the Fed rate hike cycle, which led to rather significant declines for these interest-sensitive bonds. Many of these long-term bonds have large negative annualized returns over quite a long time period. Shorter term bond yields are currently being preserved as the Fed maintains its stance on interest rates. This is a good thing for savers who are looking to maximize interest on short term reserve funds.

Higher-yielding bonds have been generally flat since the beginning of the year but still hold on to attractive, longer-term total returns. Yet, there are some growing concerns that the new tariffs will impact high-yield bond issuers’ ability to repay debt in the future. This is another implication of tariffs that needs to be closely monitored.

Foreign bonds have generally been more resilient than US bonds during tariff-related developments. Certain foreign bond markets have experienced very strong returns since the beginning of the year, many of which have doubled the total returns of similar US treasury bonds.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Stocks Lead Change

Advisory Alpha — Thu, 17 Apr 2025 17:16:13 +0000

US stocks broadly extended their losses through March, following a decline in February, as investors remained cautious ahead of significant US trade tariff actions. The introduction of increased trade barriers may hamper global output, restrict economic growth, and raise consumer prices—all critical factors that can negatively impact stock market valuations.

Before trade tariff news took center stage, investors paid about 20 times the broader earnings of US large-cap stocks, a standard metric used to gauge stock market valuations. This price-to-earnings ratio can also be viewed as a yield, with 1 divided by 20 indicating an expected return of roughly 5% from US large-cap stocks over the next 12 months. However, the US tariff proposals challenge these earnings estimates, as tariffs could temporarily depress earnings, reducing returns below the anticipated 5%. In addition, investors may recalibrate their expectations, adjusting stock market multiples downward in response to the rising uncertainty. Instead of a 20-times multiple, a more plausible equilibrium might emerge around 17, reflecting the growing risks.

“It’s crucial to remember that positive market movements can often follow periods of negative volatility. To recover and capitalize on growth, investors must remain patient, resist the urge to sell impulsively, and avoid behavioral mistakes during volatile times.”

These declines in the stock market are likely driven by a combination of anticipated earnings contraction due to tariffs and investors’ reluctance to offer high multiples in the face of uncertain economic conditions. Historically, stock market declines often precede earnings losses, while stock market gains tend to occur before economic recoveries and the return of earnings growth. Major disruptions, like US tariffs, necessitate significant adjustments by investors and businesses, requiring time for markets to restructure. As a result, investors may experience short-term losses as they adapt to these changes.

It’s crucial to remember that positive market movements can often follow periods of negative volatility. To recover and capitalize on growth, investors must remain patient, resist the urge to sell impulsively and avoid behavioral mistakes during volatile times. While it may be tempting to react to short-term declines, maintaining a long-term perspective is key to navigating market challenges and emerging stronger.

Tariffs

President Trump has been referring to April 2 as “Liberation Day,” which is the date that he enacted “reciprocal tariffs” on a large number of countries. As of April 5, 2025, foreign imports sold in the US will be forced to pay a minimum baseline tariff of 10%. The rate is higher for specific countries, depending on the trade imbalance between the US and each foreign partner, which is based on a variable rate formula.

The incremental tariff rate increases on foreign goods and services shipped to the US for consumption are significant. Previously, US tariffs broadly averaged about 2.5% on all imports, but these new tariffs would result in US tariff rates rising as high as 22.5%.

The immediate tariff effects are expected to increase consumer prices, decrease global growth, and be partially responsible for recent losses in business optimism. Professional estimates vary, but they suggest that the recent tariff increases could detract from corporate profits, similar to the potential impact of a corporate tax increase.

The US tariffs may be short-lived if other countries negotiate, which is the hope. There have been varying responses, but a large number of countries immediately began seeking negotiations with the US. The most notable retaliatory response is from China. The US and China have now gone back and forth multiple times with retaliatory tariffs. Currently, both countries have increased tariff rates to such levels that it would likely stall much of any trading activity.

On April 9, Trump surprised markets yet again with a 90-day pause on the full implementation of the new tariffs. The 10% baseline tariff will still be effective, but the additional tariffs are being suspended, except for those tariffs involving China, due to the country’s retaliatory response. This could be the beginning of a major decoupling of the world’s two largest economies.

April 2 was the start of a new normal for asset price volatility in the markets. Stocks have been swinging wildly, mostly to the downside. However, April 9 posted one of the largest positive single-day stock market returns in history after Trump announced the 90-day tariff pause. Both the stock and bond markets are desperately trying to quantify the price impacts of the tariff-related uncertainty.

Inflation & Employment

Inflation data is being closely watched to see signs of tariff-related impacts. The Producer Price Index, or PPI, was unexpectedly unchanged for the month of February. PPI measures the costs of inputs for producers, which is often used as an indication of future inflation for consumers.

The Fed’s preferred inflation measure, the Personal Consumption Expenditures, or PCE index, rose slightly higher than expected in February. Over the trailing year, PCE rose 2.8% as of February, up slightly from January.

March Consumer Price Index, or CPI, data was recently released, which surprised markets with a lower-than-expected reading. The trailing one-year CPI data showed prices increased at a rate of 2.4%, one of the lowest readings in quite some time. This was surely good news for the markets, but was masked by all of the tariff-related news.

The US labor markets continue to show signs of strength. The March jobs data came in stronger than expected and stronger than the month prior. However, unemployment ticked slightly higher from the prior month. Again, this is good news for the markets, but it was overshadowed by all of the activity related to global trade.

Monetary Policy

The Fed decided to hold interest rates at current levels in its most recent policy meeting, maintaining benchmark rates in the 4.25 to 4.5% range. This is the second meeting in a row in which rates remained unchanged.

It may now be a bit optimistic to expect two rate cuts this year, as many Fed officials expect one cut or no cuts for the year. The Fed has become less optimistic about inflation and economic growth. Specifically, its expectations for inflation have risen, and for economic growth have declined. However, the Fed acknowledged that economic growth has been solid.

Fed Chair Powell was quite articulate that Trump’s trade agenda would likely increase inflation, but the magnitude and duration are yet to be seen. Powell stated that inflation had approached the Fed’s target but that progress may now be delayed. Tariff-related inflation may prove to be “transitory” or temporary. Treasury Secretary Bessent is a big advocate of that belief. Powell originally indicated that his current base case for the tariff-induced inflation was also that it would be transitory. However, he has more recently retreated from that stance and is indicating that this inflation could be more persistent based on the larger-than-expected tariffs.

Powell continues to articulate a “wait and see” monetary policy approach, indicating the Fed needs to better understand the impact of tariffs and other policy developments from the new administration before cutting rates further. Although the recent Personal Consumption Expenditures (PCE) Index data wasn’t significantly higher than expected, it was slightly higher than expected. This further indicates that the Fed may need to wait even longer than expected, especially when considering the uncertainty associated with tariffs.

“As a reminder, the Fed’s ‘dual mandate’ is price stability and maximum employment, which will surely become a trickier balance in light of the global economic rebalancing that is now in full swing.”

As a reminder, the Fed’s “dual mandate” is price stability and maximum employment, which will surely become a trickier balance in light of the global economic rebalancing that is now in full swing.

Finally, a new development recently unfolded, and President Trump started pressuring the Fed on its monetary policy decisions. Specifically, Trump stated on multiple occasions that the Fed would be better off reducing rates as tariffs begin taking effect. Trump went on to tell Powell specifically to cut rates and to “stop playing politics.” In Powell’s recent press conference, he explained that he always wears purple ties because it’s a good color to communicate that he is nonpolitical!

Stocks

Stocks have been hit hard by the uncertainty resulting from the new tariffs. As the tariff environment has quickly evolved, stock markets have been trying to price in the related impacts. Stocks have now experienced regular swings of 5 to 10% on a daily basis since April 2. As more clarity and definition fall onto the future of global trade, markets will very likely settle down. But in the meantime, we expect continued volatility.

It is important to note that volatility is not synonymous with market loss. April 9 was a great example of upside volatility, where news broke about tariff delays, and markets responded with near 10% returns. It is incredibly important to control behavioral biases and refrain from making erratic investment decisions during times of market stress. Even missing returns from single market sessions can negatively impact long-term returns if those decisions are improperly timed.

Global diversification has again been supported over the recent past. Foreign stocks have been surprisingly stable during the recent volatility in the stock market and have been outperforming US stocks by a sizeable margin since the beginning of the year.

Bonds

Although stock market volatility has been a highly publicized event related to tariff pressures, bond yields have also been significantly impacted. When demand for bonds is lower, their yields generally increase, and prices usually fall. Specifically, 10-year treasury yields have increased quite dramatically since April 2, which may be an indication of investors reconsidering these assets as a “safe haven.” The trade tensions between the US and China seem to be the major driving force behind these yield increases and price declines. Throughout this type of global turmoil, the fact that treasury yields are rising could indicate that something is fundamentally shifting.

Yield volatility is impacting long-term bonds more than short-term bonds. This is leading to larger price declines in long-term bonds relative to bonds with shorter-term maturities. This has been yet another hit to longer-term bonds after the lengthy rate hike cycle from the Fed.

Higher-yielding bonds have been negatively impacted by the same factors driving equity market volatility, but have been more resilient than longer-term bonds. Yet, there are some growing concerns that the new tariffs will impact high-yield bond issuers’ ability to repay debt in the future. This is another implication of tariffs that needs to be closely monitored.

Foreign bonds have generally been more resilient than US bonds during the tariff-related developments. This is a departure from recent trends, as US bonds have been outperforming the global markets for quite some time.

© 2025 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Morningstar category data is provided for illustrative purposes only to demonstrate a hypothetical investment vehicle represented by a group of similar investments. Morningstar category data is an aggregation across actual funds contained in the category, but it is not possible to directly invest in a category. Index returns are provided for illustrative purposes only to demonstrate a hypothetical investment vehicle using broad-based indices of securities. Unmanaged indexes are not available for direct investment. All data shown does not include internal fund expenses, trading costs, financial advisor fees or commissions, or taxes. This information is not intended to predict the performance of any specific investment or security. Past performance is no guarantee of future results.

Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.

Cole, A. “Trump’s Reciprocal Tariff Calculations Are Nonsense, Will Punish Mutually Beneficial Trade”, Tax Foundation, 3 April 2025, taxfoundation.org/blog/trump-reciprocal-tariffs-calculations/. Drumm et al. “The New US Tariffs”, G|M|F, 7 April 2025, https://www.gmfus.org/news/new-us-tariffs. Cembalest, M. 2025 Eye on the Market Outlook, Redacted: Straight talk from the CEO front lines on Liberation Day,” J.P. Morgan, 2 April 2025, page 5.

Markets Rerated Change

Advisory Alpha — Wed, 12 Mar 2025 14:53:12 +0000

Investors adjusted expectations in February, as they attempted to decipher how tariffs, government austerity, and unresolved regional wars affect their investments and portfolios. As a result, market interest rates and equity prices declined based on how investors think those broader themes change future investment returns

This year started differently than most in US equity markets. Specifically, US stocks have underperformed foreign stocks. Foreign stocks have offered investors favorable returns over two-months, while US stocks align closer to breakeven with beginning year levels. This early-stage performance gap between the two markets seems informative and meaningful for several reasons. For one, relatively high US stock market valuations may have pushed investors away to other places, like foreign stocks or fixed income. Secondly, fiscal policies aimed at government budget cuts, while the Federal Reserve retains strict monetary policies, increase economic concerns.

Diversified investment portfolios receive returns based on risks they cannot diversify away. This is what investors call systematic portfolio risk. Geopolitics contributes to systematic portfolio risks, and the current geopolitical environment seems heightened due to trade tariffs, government austerity, and unresolved regional wars. Specifically, tariffs can produce economic challenges through increased global prices, lost consumer surplus, and business contractions in export-driven markets. However, policies favoring US tariffs may represent a broader plan to reduce generationally large trade deficit and dependency on foreign credit, which finances trade deficits. In the long term, trade tariffs could strengthen the US’s competitive and economic position as it deleverages from the rest of the world.

Another key takeaway from February was investors saw more downward pressure on US government interest rates. Government interest rates matter because they create the floor for many other loan types, such as home, consumer, and business. Some investors credit the US government’s latest financial austerity and effort to restore bond investor confidence as reasons why interest rates lessened. Bond investors need assurances their government will not debase their prior investments with uncontrolled spending. The current federal administration may be signaling it won’t with its current austerity plans unless its plans begin to do more economic harm than good.

Unfortunately, fiscal austerity has downsides. Austerity means removing economic expenditures from the economy. That can translate into slower growth, lower output, and less GDP per capita. More importantly and sadly, it can create job losses and higher unemployment. Many of these austerity repercussions are recessionary forces unless expenditures increase elsewhere, such as in consumer and business economic sectors. However, economic slowdowns can create even more downward pressure on market interest rates, which the US government could use. The US Treasury will soon refinance about one-fifth of its national debt over the next three years. It requires lower interest rates to sustain its economic budgets and prevent losses of other essential services the federal government provides.

One subject that likely makes investors confident is the stock market’s ability to earn profits. Even though geopolitical risks may have elevated, the business environment looks better, given the innovation wave that has swept through. As new technologies enter broader markets, they are expected to sustain and grow stock market profits. Profits are necessary because corporations use them to pay dividends and buyback shares. In addition, robust profits help support market valuations in the broader context of stocks.

Recent interest rate and stock market volatility could offer important information. Interest rate declines might signal confident bond investors, which may draw new investment to bonds before there is a chance for rates to go lower. Further, investors will likely find it hard to avoid stocks as volatility will likely cause stock dividends and share buyback yields to rise. It is important to exercise patience and self-control to realize the long-term benefits of a thoughtful and appropriate portfolio allocation. Although it can be difficult to look past daily market mechanics or volatility, investors should strive to focus on the fundamental qualities of their investment yields or growth in the broader context of their financial plans.

Economic Vibrancy

Advisory Alpha — Thu, 13 Feb 2025 21:06:10 +0000

More Januarys than not seem to experience positive market returns. A few economic theories attempt to explain why this market anomaly could exist. One theory is some investors sell securities in December for tax purposes and turn into net buyers in January. Well, this January followed historical examples as global markets broadly earned investors returns in January, setting 2025 off with positive momentum.

Asset classes such as equities, bonds, and commodities survived an intense and complicated month for investors. First, there was the presidential inauguration, in which power transitioned smoothly to the new administration. President Trump’s tariff agenda could cause some alarm from a purely financial perspective. However, market prices have barely flinched and remained firm as new information around tariffs updates frequently. This market resiliency among investors could indicate that tariff news, their costs and benefits, and the expected durations of the tariffs are already reflected in global market prices. In other words, tariffs present no reason to sell investments now because markets previously accounted for those factors and likelihoods through discounted cash flow analyses many months ago. Still, investors should have some tolerance for future market adjustments as the likelihood of tariffs becomes a reality.

The December Consumer Price Index (CPI) reported inflation finished in line with expectations. Yet, there are concerns that inflation may be stickier later due to tariffs. Yes, headline inflation rose month over month in December, but that was due to volatile price inputs like food and energy. More importantly, the core inflation rate, which excludes food and energy, decelerated and was in line with expectations in December, illustrating the positive economic change that has occurred since interest rates increased due to monetary policies. Furthermore, the steady inflation report increases confidence among bond investors since above-average inflation appears less threatening now compared to two years ago.

January also offered investors their first monetary policy decision in 2025. As expected, the Federal Reserve left interest rates alone. However, investors did notice a hawkish signal based on what was omitted from the Fed’s prepared remarks. To be hawkish means to expect higher interest rates for more extended periods. The Fed removed commentary regarding the progress inflation has made as of late. As a result, investors viewed the omission as a possible indicator that some market inflation risks may still exist. Regardless, investors saw through the Fed’s interest rate decision, leaving global market valuations relatively unchanged.

One event in January might have caught investors by surprise. A Chinese company released open-source code for its Deepseek AI model to exemplify its technological prowess. American companies, such as Open AI, Google, and Meta, instantaneously felt the threat of its advanced features and low-cost tech. The Deepseek model showed investors that high-quality AI is possible with fewer hardware demands and monetary costs. Immediately, investors sold NVIDIA’s stock after they learned that maybe fewer hardware sales would be needed as AI technologies advance. The NVIDIA reaction is interesting because it’s a modern example of what can happen to a stock when investor expectations quickly change.

US gross domestic product (GDP) did well in the fourth quarter of last year. Although US expenditures grew slightly less than in the third quarter, its fourth-quarter growth indicates that the economy is currently healthy and stable. Investors can enjoy this moment since the economy’s growth means incomes have risen, debts remain serviceable, and the economy is productive, which may be beneficial for the investment landscape.

Investor expectations for a positive January were met this year. One favorite investor trope is that where January goes, so goes the market. The positivity is welcomed, but the road to ending 2025 is long, and investors should expect to see quite a few economic developments along the way that will surely continue to influence the financial markets.

New Year Change

Advisory Alpha — Mon, 13 Jan 2025 20:58:18 +0000

The New Year holiday is a special time to reflect on what has passed and strive for a better future. A nineteenth-century poet, Alfred Tennyson, succinctly described it as a time to "ring out the old, ring in the new" in his poem, "In Memoriam A.H.H." Investors can likely identify with Tennyson's trope as the most recent chapter in investment history filled with examples of big tech, inflation, and higher for longer market interest rates draws to an end, preparing the next chapter after it for storytellers of the market.

Last year ended as an extremely productive year for the economy and broad financial markets. Incomes grew in the US yet again, which surely helped sustain the economy. Further, investment returns in the broad equity markets for the year surprised many investors. Last year's continuation of the bull market resulted in over twenty percent for investors invested in US large caps. 2024 became the second consecutive year in which US equity markets returned more than twenty percent in a single year, a rare feat, happening only on ten other historical occasions dating back to 1870. As a reminder, 2023 generated returns similar to the calendar year 2024.

However, as a prior era slowly winds down, investors are beginning to recalibrate their focus on new changes that can impact markets and the economy. Such changes include new executive leadership at the federal government level and a new lexicon of investor vernacular to consider, such as deregulation, deportations, and trade tariffs. For example, stakeholders interested in the success of the US economy are considering proposals to relax certain bank capital rules, known as Basel III laws, that could potentially unlock US credit and drive economic growth, maybe even lessen market yields because of the increased supply of newly available bank credit.

The interest rates investors can earn on long-term government bonds have become more of an issue lately, as what happens when government interest rates can have profound impacts on the broader financial system. Specifically, long-term rates took a significant step higher last month. In addition, the present path of long-term rates does not compare well with historical paths that long-term rates have traveled after the Federal Reserve cut interest rates. In past rate-cutting cycles from the late 1980s through the end of 2019, long-term government rates are typically lower sixty to seventy days after the Fed's first rate cut. Moreover, last month's increased volatility in equity markets may share some direct links with rising government bond yields since a bond's interest payments over its life offer less uncertainty than the earnings from businesses over an extended number of years.

So far, equity markets and the economy have handled higher interest extremely well since the Federal Reserve began to raise interest rates in March 2022. US stock markets, in particular, have stood resilient in the face of higher borrowing costs due to the health of US balance sheets before interest rates rose. In addition, broad stock markets may have benefited from a lull of new supply of new equities coming to market. The rate cycle that kicked off in 2022 has had a long-lasting and negative effect on the availability of new public stock making it into the markets. As a result, it has forced investors to compete for equities that already exist on equity exchanges because there is little to no new supply available to buy. Some investors attribute the recent rise in equity market concentrations to the fact that there is not enough supply available for investors to purchase.

The US economy has continued to grow more than most seem to have expected. Further, consumer spending accounts for roughly two-thirds of the US economy and continues to surprise on the upside. This is bringing some solid economic momentum into the new year. However, economic and market growth surely won't materialize without some level of uncertainty and risk. As a result, the New Year represents a good time for investors to address their goals, risks, and overall financial situation so that they can appropriately structure their investment allocations and account for any necessary changes in their financial plan.

When Uncertainty & Opportunity Meet

Advisory Alpha — Wed, 11 Dec 2024 16:10:30 +0000

After an impressive month of financial returns, November may have offered investors new investment insights. Many market and economic events unfolded over the recent past creating uncertainty and potential opportunity. The US election ended undisputed; candidate selection began for important executive branch jobs; threats of trade tariffs elevated; external conflicts consumed global politics; and US financial markets took another favorable step forward.

US financial market returns did especially well over the last month, overshadowing performance from many non-US markets. Index earnings reported in major US equity indexes continued to exceed expectations, with many more companies listed in the indexes beating estimates compared to missing. Increased earnings generally grow dividends and support corporate actions like stock buyback programs or mergers, which can be accretive to investor per-share earnings and bullish for market prices.

Long-term interest rates also declined in November, which lifted bond valuations since bond quoted yields and prices are inversely related. Investors approved of the language and rhetoric used to describe DOGE, the Department of Government Efficiency, which promises to slash trillions from the federal government’s annual budget. A tightened fiscal budget seems to be what investors desire. In addition, the federal government can win when it signals plans of fiscal responsibility because it can instill confidence in investors to lower yields, which can lessen the future costs of federally issued debt.

Digital assets took the spotlight again in financial capital markets last month. Crypto returns generated last month were extremely volatile. It just so happened the speculation swung in favor of its investors, the kind of positive volatility event investors like. The President-elect’s pick for US Treasury Secretary, Scott Bessent, and the planned resignation of SEC Chairman Gary Gensler may have excited the crypto bulls. Bessent might favor blockchain technology as a way to modernize finance. Investors may have seen Chairman Gensler as an obstacle to making crypto more publicly available. Any uninvested investors are probably wise to remain highly skeptical of the digital asset markets. Its registered volatility makes it highly probable that it could whipsaw to the downside in spectacular form, just like it did to the upside.

Foreign market returns, expressed in US dollar terms, have seemed to stall out as of late. A lot has happened recently that could adversely impact global growth, consumption, and prices tied to political uncertainties and conflicts associated with Europe, NATO expansion, the Middle East, and the spillover effects these risks have on neighboring countries. As a result, investors could begin to avoid foreign investments if certain regions around the world look less stable than before. However, foreign-diversified security returns have been fairly strong this year, especially when priced in local currency terms. This year’s rise in the US dollar’s global purchasing power has masked a portion of the positive performance experienced in foreign markets because investors with unhedged currency risks have lost to the US dollar’s strength.

Upon an already strong year, the US dollar strengthened after the US election. Whether related to perceived safety, threats of US trade tariffs, or investors believing the US economy will grow, the US dollar’s strength benefits many types of stakeholders, like American consumers and investors with US investments. However, global currencies rarely hold positions of power forever since competitive currencies often revert and adjust to normalized levels along with global macroeconomics. Paradoxically, some investors could view this as an opportunity to diversify away from US dollar risks, especially while the US dollar is so strong.

Many investors will consider how these market and economic developments should impact their portfolio allocations and financial planning goals. As this year begins to wind down, it is also important to consider applicable tax planning and financial planning strategies that should be implemented within the calendar year. Although the political environment, monetary policy approach, and geopolitical landscape is changing, investors will want to focus of discipline, diversification, and sound planning to guide the investment-decision making process. a

Diversify the Elections

Advisory Alpha — Mon, 11 Nov 2024 21:07:02 +0000

The United States concluded its 60th quadrennial presidential election, electing a Republican as the nation's next commander and chief and 47th President to serve in the White House. In addition, the election results turned the US Senate over to the Republicans after four years of Democrat control. With another layer of uncertainty related to elections removed from markets, market prices are adjusting to the anticipated policies of the new administration.

Before the election, financial assets broadly lost value in October, with mild losses observed in categories such as equities and bonds. Moreover, physical market-linked returns in broad commodities and precious metals improved, possibly because investors diversified away from certain categories of monetary risks before America elected its new political leaders. However, the election results seemed to uncork certain areas of financial markets, which has set November off on a better trajectory than October in terms of general stock market performance.

Now may be a suitable time for investors to broaden their portfolios to include other important segments of the market that receive less attention, given the current degree of market concentrations in US large-cap stock indexes and changes in the political environment. One area that investors might consider is the relatively cheaper, compared to US large-caps, US small-cap market index. Small caps have underperformed large caps for many years and in many geographies. With greater sector weights to financials, industrials, and energy, this market index may appear like an attractive diversifier in investor portfolios and a hedge against any future monopoly breakups or anti-trust law enforcement against extremely large corporations domiciled in the United States.

The national conversation about regulating big tech and breaking up monopolies may gradually evolve over the next few years in ways that raise awareness and openness to new and emerging technologies in the United States. Specifically, President-elect Trump hyped digital assets on the campaign trail, explaining that he hoped to see America become a global leader in crypto. That seems like a remarkable change in public sentiment over a fairly short window while investors continue to receive greater access to cryptocurrency technologies as entry barriers fall. However, investors need to remain aware of the extreme risks and volatility of uncharted technologies and loosely regulated markets, which prevents many investors from gaining sufficient confidence in using this exposure on a broad basis.

Independent of any political biases, the short-term response of certain financial markets to the post-election results appears impressive. However, this is when investors should remain vigilant of the many financial risks that lurk and improve portfolio diversification. This is especially true for investors that have become increasingly concentrated in certain assets, investments or market exposures due to strong performance over the recent past. In addition, geopolitical risks connected to wars and potentially increased trade tariffs may lead to additional inflation, which may impact asset returns and serve as other key reasons to consider broader portfolio diversification.

Regardless of the party in office, the country’s leadership has a series of challenges to address, including massive fiscal deficits, trade deficits, and mounting public debt. Concerning financial deficits and debt, both can be extremely inflationary. As a result, investors widely accept that gold prices and government yields have significantly increased lately because of a worry that inflation could return or growth could slow, which may cause the federal government to respond with even larger account deficits.

Hopefully, Americans stand united through this election season and strive to work together to solve tough problems and create a better country for its current and future generations. For better or worse, the next four years will likely look fairly different under the newly elected leadership, which will surely impact investors. Although for some, it may feel like broad-based portfolio changes are necessary, it is important to remain focused on your specific risk tolerance and financial objectives when considering investment changes. Discipline, diversification, and commitment to your financial plan are important considerations for investors, especially during these times.

Interest Rate Harvest

Advisory Alpha — Thu, 10 Oct 2024 20:05:28 +0000

Many cultures of past and present have symbolized September as the harvest month. Throughout Switzerland, the word used in place of September is Herbstmonat, which translates to harvest month. Former Anglo-Saxon tribes who used to inhabit parts of Great Britain knew September as barley month called Gerstmonath. Financially and metaphorically speaking, this September harvested the first federal interest rate cut in a series of future cuts expected for the economy since the Federal Reserve raised monetary policy rates eleven separate times, starting in 2022.

The Federal Reserve reduced monetary policy interest rates by one-half percentage point after the Federal Open Market Committee met in September. The federal overnight annualized interest rate effectively declined to five percent from the five and one-half percent that used to run the economy.

Financial markets barely budged when the Chairman of the Fed delivered the news. Investors felt highly certain the Fed would reduce rates in September, which met market prices already included that information on the day of the cut. However, the next market day opened with significant investor demand for small-cap equities. As a result, this year’s small-cap equity returns took a meaningful step higher in what seemed like a blink of an eye. When small caps receive that much interest, it can sometimes serve as an early expansionary signal since small-cap industries are far more sensitive to the domestic affairs of businesses and banks.

Bond investors who have braved the higher interest rate cycle over the past couple of years may have observed their fortunes change as of late. The federal interest rate cut helps lessen the risks that market interest rates will move much higher from here. In addition, it can increase investor confidence that the worst inflation is over, so investors can likely worry less about unexpected future shocks that subtract from their investments. Bond market returns are up handsomely this year, bringing medium to long-term bond market returns closer to the market yields that existed back when investors originally invested.

Another neglected market area that suddenly reversed and gained investor attention in September was emerging market equities. For quite some time, investors have seemingly been disinterested in emerging markets encompassing places in China, India, Brazil, and many more geographies. The federal interest rate decision helps emerging markets since many emerging market debts use US interest rates to benchmark the debt’s coupon payments. However, China’s government announced plans to stimulate its economy and expand economic production, which might have had a bigger effect than the US interest rate announcement. Investors may now find Chinese equity valuations attractive if China’s economy is about to re-enter a new growth cycle after being economically hurt by over-inflated and leveraged real-estate developments.

The US dollar has strengthed since the federal rate dropped after mild weakness in the weeks leading up to the interest rate decision. Some investors may have expected the US dollar to stay in its weakening channel after the interest rate cut, given that the US interest rate advantage narrowed by one-half percent. Instead, the US dollar showed strength, which again seems like a favorable reaction that can happen before the economy returns to growth and productivity. Strong demand for US dollars gives the impression that investors badly desire US investments, likely because the US has continued to exceed in many areas, such as innovation, competition, and property protection.

This year’s September harvest produced a federal interest rate cut and broader participation in capital markets that have fallen behind other comparisons that occupy a much narrower space, which can feel crowded and concentrated. In any event, now that the first official interest rate cut is registered, the path forward for monetary policy seems headed in a better direction, with future decisions centered around reaching economic normalization and federal policy stabilization as quickly as possible. Hopefully, new and future policy accommodations will harvest in another economic expansion, which investors won’t want to miss.

Time to Retire a Cycle

Advisory Alpha — Mon, 09 Sep 2024 16:19:56 +0000

Time looks ready to expire on the elevated short-term interest rates that investors have enjoyed over the past few years. For far longer than most probably expected, the Federal Reserve maintained restrictive interest rate policies on the economy to drive inflation out. The Federal Reserve's restrictive policies that introduced higher interest rates to the markets benefited Investors without much economic damage. But, the current interest rate policy and cycle won't last forever because it can eventually turn counterproductive to economic growth and employment.

A conventional expectation among investors is that it takes six to twelve months before a change in economic policy affects consumers and businesses. The duration of the current monetary policy or cycle has gone on for far longer than most investors probably expected when the Federal Reserve first increased interest rates thirty months ago in March 2022. As a result, many thought an economic recession would have occurred by now, and the Federal Reserve would have reduced interest rates in response to economic weakness. Neither has happened yet.

The unemployment rate is a carefully watched number by investors due to the tight connection between labor markets and the economy. Investors treat unemployment as a lagged indicator that adjusts slowly after economic cycles change. Maybe now, after an exceptionally long lag, the unemployment rate has started to respond to the Federal Reserve's elevated interest rate policy. The unemployment rate has risen nearly a full percentage point recently from the record lows it obtained after the pandemic ended. Currently, there are about seven million unemployed and eight million vacant jobs. So, that's slightly over one available job for every unemployed person, which is a significant change compared to a year ago when the ratio was closer to two jobs for every unemployed.

Recent trends in the labor market may have started to show the impact that higher interest rates have had on the economy. In response, investors feel almost certain the Federal Reserve will make its first interest rate reduction at the next meeting scheduled in September. In addition, investors seem highly confident that ultra-short-term interest rates could be a full percentage point lower by year-end. Some investors believe the economy needs these significant interest rate reductions immediately if the Federal Reserve intends to keep this economy out of recession. The Federal Reserve will likely move its policy rate closer to where investors have priced market rates to avoid frictions in the financial system.

Based on past cycles, economic activity has traditionally performed well when the Federal Reserve maintained policy rates near the nominal expenditure growth rate observed economically. A good model for nominal expenditures is the economy's gross domestic product because it includes a price component and a real growth rate. The average annualized US GDP rate in the second quarter of this year conveniently approximates where the Federal Reserve has placed its policy rates. However, given that inflation rates have declined recently and unemployment has risen, interest rate policy at the Federal Reserve could fall behind where the economy currently stands. That could be a bad look for the Federal Reserve, which it likely hopes to avoid, and another reason why it may begin to decrease rates soon.

As investors, it's important to be open to change because it's inevitable, and markets embrace change constantly. Examples include the economy and stock market, which have experienced significant changes over time regarding diversity in industries, sectors, and geographic exposures. This diversification creates opportunities for investors. Similarly, the transitioning monetary policy cycle also presents opportunities for investors to reassess risk, review their financial goals, and implement any applicable portfolio changes.