Following a downright scary first three weeks, global financial markets rallied strongly to post impressive 2nd quarter gains across the board. Markets initially reacted to the Trump administration’s “Independence Day” tariff regime by selling everything as fast as possible, leading to a 13.74% plunge in the S&P 500 index in the ten trading sessions between March 26th and April 8th. The April 8th low was 18.9% off the prior all-time high set just seven weeks prior.
Cooler heads prevailed as Q1 earnings reports surprised slightly to the upside, and Trump signaled that the initial tariff rates were negotiable. Fears of rapidly rising tariff-induced inflation and declining profits gave way to hopes that the Fed would re-start monetary easing in the form of rate cuts, which have been on hold since the 2024 elections were settled. Interest rate cuts remained merely wishful thinking on Wall Street over the course of Q2, but that didn’t stop the major equity market indices from advancing rapidly back to historically rich valuations relative to profits by quarter-end. Even the situation in Iran drew a “meh” response from global markets, with the exception of the crude oil trade.
Wall Street’s rapid mood swings are illustrated by the VIX, a measure of market volatility often referred to as the ‘fear index’, which moved from 15 on the February 19th all-time S&P 500 high to 52 on the April 8th correction low, and finished Q2 at 17. Perhaps most concerning is that all this movement took place in the absence of any hard data indicating significant near-term shifts in the state of the economy. Whether or not the business-friendly tax and regulatory proposals contained in the now-passed Big Beautiful Bill combined with stable inflation and employment data are sufficient to sustain this market rally remains to be seen in the absence of Fed rate cuts, which would presumably occur only if the economy turned south.
The Q2 market scoreboard follows: S&P 500 +10.57%; NASDAQ Composite +17.75%; DJIA +4.98%; Russell 2000 +8.11%; MSCI EAFE +12.07%; MSCI Emerging Markets +12.20%; Bloomberg Aggregate US Bond index +1.60%. While corporate bonds drove market gains in Q2, US Treasury bond trading was highly volatile. Gold, the universal safe haven asset, continued its ascent, gaining 5.50% in the quarter. One must ask when, not if, the schizophrenic stock traders’ next mood swing will occur.
Risk-aware investors must not be lulled into complacency by this latest V-shaped crash-recovery episode. High stock valuations amid low conviction beget high volatility.
Important Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.