Market Commentary

• Our regular readers have certainly not forgotten over the past few weeks that some potentially serious trade frictions were just around the corner.
• The tariff deadline extension and upcoming expiration of the pause with China are reminders that we are still in the early stages of hammering out U.S. trade relationships with our largest global partners.

Last week saw the one big beautiful bill act (OBBB) get through the Senate and onto the president’s desk for his signature on Friday, a feat not many counted on happening just a few weeks ago. On top of that, the S&P 500 Index set a new record closing high on Thursday, the day before the Fourth of July holiday and closed financial markets in the U.S. But now it’s a new week and some old issues are once again back on the front burner causing investor caution and volatile markets. You can’t take a day off in this news cycle if you want to keep up.

Our regular readers have certainly not forgotten over the past few weeks that some potentially serious trade frictions were just around the corner, ready to rear their ugly heads and impact global stock and bond markets. So now, here we go. The first 90-day pause of largely reciprocal tariffs with a number of important trading partners was due to expire today, July 9. But as the financial markets woke up and got ready go on Monday morning the headlines hit the newswires that the pause was being pushed back to August 1 and letters were going out to various trading partners (14 total) encouraging them to come to an agreement with the U.S. by this new date. It was also announced that Japanese and South Korean companies would be subject to 25% tariffs on August 1 unless their products are made in the U.S. per the president’s letters to these trading partners dated July 7.

Now, as far as the financial markets are concerned, the deadline extension, letters, and the upcoming expiration of the 90-day tariff pause on August 12 with China are just a big reminder that we are still in the early stages of hammering out what U.S. trade relationships with our largest global trade partners will be. After a brief time-out while Congress negotiated the OBBB, these next few weeks are likely to feature renewed bouts of equity- and bond-market volatility. In addition, the economy is slowing and tariff-related price pressures are just now starting to work their way into the economic data.

Remember, U.S. consumers have yet to see the full effect of tariffs at this point. Granted, the magnitude of implementation has been uneven and inconsistent in recent months, but consumers are in many cases buying goods that were inventoried by sellers prior to the application of tariffs. Once those inventories are depleted and are replaced with goods that are subject to tariffs, we would expect to see goods inflation increase into the end of this year and in the early months of 2026. Rising inflation is likely to increase market worries as market consensus calls for two rate cuts in 2025.

Wondering what to do now? We still favor overweight allocations to the Information Technology and Communication Services sectors, but the recent run-up in prices may give investors a chance to trim and reallocate to the Energy, Utilities, and Financials sectors. The first two of those power the data centers that artificial intelligence needs but we believe look more reasonably priced than Tech and Communication Services. We continue to look at pullbacks as opportunities to buy into favored sectors. 

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject an investment to adverse economic or regulatory occurrences affecting the sector. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

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