Don’t Just Do Something, Stand There! | Steve Henderly, CFA
Printer Friendly PDF: Link to PDF Version
The title phrase is most often attributed to the White Rabbit in Alice in Wonderland, yet again proves to be sage investing advice when thinking about the markets during the 2Q and 2025 YTD. From a painful drawdown of -15% at the April lows to finishing +5.5% by June 30, it was a remarkable turnaround. It took just 55 trading days for the S&P500 to fully recover back to its all-time highs – the fastest return to a new high following a drawdown of that size or greater in history (see below)! Similar to the sharp drawdown experienced in March 2020 during Covid, the most successful investors this year are likely those who “just stood there” in the face of wild swings and multi-faceted uncertainties linked to trade (tariffs), tax policy, interest rates, and unsettling geopolitics (a 12-day war) to name them broadly.
While the soft-data – such as sentiment readings on consumers, businesses, and investors – suggest continued pessimism and elevated uncertainty, hard data like employment, consumer spending, and pricing data remained OK with no real measurable impact from tariffs beyond the wild swings in GDP. Will the hard data materialize in the 2nd half of the year?
Adding more complexity to the 2Q was the escalation of tensions in the Middle East. On Friday the 13th, Israel attacked Iran’s nuclear sites representing a major escalation. Oil briefly spiked more than 20%, then retreated quickly following the US bombing of key Iranian nuclear sites, leading to a ceasefire which as of this article remains intact (fingers crossed).
While the S&P500 concluded the quarter making a fresh record high, most clients are even more surprised to learn that foreign markets as measured by the MSCI EAFE are up nearly +19.5% YTD despite tariffs, wars, and softer economic conditions compared to the US – a nearly 15% advantage! A good portion of this is attributed to a weakening of the US dollar in 2025. From many perspectives, international valuations suggest there is room to run.
Perhaps the most important takeaway from all of this – whether looking at domestic, foreign, or critical commodity markets like oil – is that when so much pessimism and uncertainty is already priced in, investors are wise to spend more time thinking about what could go right rather than what else can go wrong. Often “don’t just do something, stand there!” is the best advice.
Coyote vs. Bunny: When Markets Meet Math
Most are familiar with the old cartoon dynamic: Wile E. Coyote runs full speed off a cliff in pursuit of the Roadrunner. For a brief moment, he remains suspended in mid-air – until he looks down. Only then does gravity kick in. In contrast, there’s the Energizer Bunny—unstoppable, oblivious, and marching forward regardless of obstructions that may get in his way.
Today, the U.S. government looks a bit like both. It continues to spend, borrow, and legislate as though there’s no constraint – no fiscal gravity. Trillion-dollar deficits and interest costs on the debt now exceed what is spent on defense annually. Yet Congress just passed a tax and spending bill extending current tax rates and providing other provisions that reduce effective corporate tax rates and front-load business incentives. These can be good for the pace of economic growth and business confidence, but it also feels like the fiscal Energizer Bunny is on full display.
Historically, when interest costs reach about 14% of total government spending, markets take notice. Today, the United States is closer to 18% (!). We now seem in a period where rising yields and mounting debt service costs are receiving more attention and could weigh on valuations and potentially confidence.
The good news? There’s still time for policy course correction. If inflation remains contained, the Federal Reserve will likely resume rate cuts perhaps as early as the 3Q. This would begin to ease pressure on government borrowing costs as well as the housing market (prices appear to be softening in recent months). If tax legislation results in real business investment and productivity gains, that could help offset some of the longer-term challenges via higher growth and tax revenue.
Even the Energizer Bunny is not without limits. Whether the U.S. can continue to borrow at low rates without consequence ultimately depends on the confidence of investors, both foreign and domestic. If that confidence wavers, higher interest costs may become self-reinforcing.
For now, markets continue to run as the worry of economic recession is easing. Monitoring bond yields will provide feedback about the overall concern for government debts and deficits, which drag on economic growth.
Steve Henderly, CFA | Nvest Wealth Strategies, July 4, 2025
“The Fog of War”
…is a phrase typically used in military contexts to describe the uncertainty and confusion experienced by participants in battle. It refers to how the chaos of combat can make it difficult to know what’s happening – where the enemy is, what their intentions are, and how events are unfolding in real time. Since Trump took office the “fog of war” is thick – not just the kind associated with recent military conflict in the middle east, but also the confusion and unpredictability surrounding interest rate policy, tax legislation, trade, borders/immigration, and global stability. Each is a “battle” of its own; investors are required to navigate all simultaneously.
In the midst of the fog is a familiar question: What comes next? Inflation readings remained relatively tame in the 2Q with core CPI hovering around 2.8% year-over-year (see chart on page 4) – potential shocks still loom. Tariff threats continue to simmer, and the major flare up in the Middle East in June reminds that the risk of oil-driven inflation can resurface any time; some analysts suggest disruption in the Strait of Hormuz could send crude to $120/barrel which would act as a tax on consumers and complicate the Federal Reserve’s already delicate balancing act. 
Interestingly, history reveals that world conflicts such as what is taking place in the middle east tend to produce little impact on the financial markets over all but the shortest timelines.
De-globalization is a major theme, and the effects can be inflationary in the form of higher wages, greater volatility and overall global defense spending. These threaten corporate profit margins while increasing volatility and demand for safe-haven assets.
With that in mind, there is chatter by some Fed officials about when to resume interest rate cuts. The Fed held steady in June, with Chairman Powell wary of acting too soon and potentially reigniting price pressures. Regular arrows being shot by President Trump toward Fed Chair Powell unfortunately complicate the Fed’s dilemma as it desires to preserve its independence – not appear influenced by political pressures. Making the dispute even more visible, there are reports that Trump may announce his pick for next Fed chair early (September or October). Whoever is the next Fed chair, there is a cruel irony: higher interest rates, a tool to fight inflation, are driving up the government’s borrowing costs. Lower rates would benefit consumers and businesses requiring capital, and also our Federal government. The market is again anticipating the Fed will cut twice, or -0.50%, before year-end.
On the fiscal side, Congress just approved a sweeping tax and spending package known as the “Big Beautiful Bill”. The bill includes retroactive and front-loaded business incentives, such as R&D and capital equipment deductions, potentially a major tailwind for corporate investment. [We will also be studying individual provisions to understand how they may impact client financial projections for our LIVING LIFE planning.] In 2017 the “Trump Tax Cuts” (or Tax Cuts and Jobs Act) passage drove animal spirits and the market drifted higher for 12 consecutive months. As deficits widen however, questions emerge: who buys US bonds? And at what yield? It is noteworthy that tariffs if left in place are projected to offset the cost of these items, so if tariffs do not “stick” then the consensus view is that deficits are further aggravated.
International investing, enjoyed significant outperformance relative to domestic during the first 6 months of 2025, and the tailwinds seem likely to remain in place the remainder of the year and beyond. Despite a 15% outperformance vs. US stocks YTD, valuations are still meaningfully more attractive for international stocks as observed by the gap shown in the chart to the right.
Similar charts depicting US dollar strength vs. foreign currencies exist; and a weakening dollar aids foreign investment returns. Divergences in earnings multiples like shown (right) do not persist forever.
As we move into the 2nd half of 2025, the US must navigate a current economic growth scare against the backdrop of the multiple uncertainties discussed. Trade negotiations appear to be less hostile than a few months ago (subject to change at a moment’s notice) at the same time the labor market is softening with jobless claims creeping higher. There’s likely just enough economic softness to dissuade the Trump administration from taking a hard stance on the new reciprocal tariff deadline at the end of July despite verbal commitment that this date is firm – the pause was set to conclude this week (we’ll see). We remain constructive on the market over the medium term, but with stock prices (specifically large-cap growth) back near all-time highs, do not be alarmed if any additional “fog” causes the market to stall or sag.
While the current market recovery may cause you to feel exposed (new all time highs suggest caution), be aware the market’s swift recovery since April is strongest among the biggest companies making them again the most expensive on an earnings-adjusted basis. Still, forward performance coming off notable lows skews positive +3, +6 months forward. We continue to emphasize more attractively valued areas of the market, including foreign as well as an opportunistic theme of energy infrastructure for exposure to the boom in AI, data centers, and re-shuffle of supply chains (Symbol: EMLP, which will benefit from the bottom left chart showing spending on data center construction on page 4). Regardless, stay invested. The fog of various “wars” will always be present in investing – in terms of budgets, tariffs, interest rates, policies, etc. It’s only in hindsight that the fog was not there at all.
What is a TOD?
Ever wondered how to pass your assets to loved ones without the hassle of probate? A Transfer on Death (TOD) designation can be a straightforward solution. This handy estate planning tool lets you transfer assets like bank accounts, personal brokerage portfolios, and even real estate directly to your chosen beneficiaries upon your passing. Unlike a will, which can become tied up in lengthy and public probate proceedings, a TOD ensures a swift, private handoff. Best of all, you keep full control of your assets during your lifetime allowing you to utilize funds, sell assets and change beneficiaries at anytime. Upon your death, your TOD beneficiaries simply provide a death certificate to claim the assets, making the process seamless and cost-effective.
Our team regularly sees cases where a TOD proved valuable for estate planning; often in lieu of a trust or more complex estate planning. Setting up a TOD is simple and straightforward. Just complete a form at your financial institution listing your assets and designate your beneficiaries. At Schwab, these changes can be made easily online.
Before doing so, it is important to note that a TOD overrides the instructions that may be contained in one’s will for the specific assets or account it covers, so keep this in mind when making changes. While TODs are perfect for straightforward setups, offering privacy, affordability, and probate avoidance, they don’t shield assets from creditors like trusts can and aren’t suitable for complex estates or assets like retirement accounts, which already utilize beneficiary designations as part of their standard setup.
Please contact our team with questions or assistance if you are considering adding or updating beneficiary instructions!
Charts of Interest:
Nvest Engagement:
Delivering financial peace of mind is our ultimate goal. A quick summary of timely and helpful content our team shared over the past month via our LinkedIn and Facebook pages.
Like us on Facebook | Follow us on LinkedIn
- Always a sensitive subject, but a reminder to not let politics influence your investment strategy. LINK
- A Transfer on Death (TOD) designation is one of several useful estate planning tools. Let us know how we can assist. LINK
- Please join us in congratulating Diane Carpenter on her 3 year workiversary! We appreciate everything she does for our team and clients. Congrats Diane!