Greetings, and Happy Birthday, America!
As Americans, it is easy to take our freedoms for granted. We may complain that government is too big, does too much in some areas, and too little in others. Nonetheless, thanks to a democratic experiment begun 250 years ago, we have broad freedom to live as we wish and choose who leads our government. That experiment must be reevaluated and renewed from time to time, but its founding principles still resonate everywhere. So let us pause to give thanks to the mavericks who launched it and consider our role in carrying it forward for future generations.
Economy and Inflation
Higher oil and gas prices due to the war in Iran pushed inflation, as measured by the Consumer Price Index, to 4.2% in May, the highest level since April 2023. Even with the pressure from higher gasoline prices, the U.S. economy remains on solid footing. The May ISM Manufacturing survey suggested that sector may be heading for its strongest expansion in four years. Job growth also exceeded expectations in April and May. June hiring was less robust, but the unemployment remains at a low 4.2%.
At the start of the year, many expected the economy to slow and lead the Federal Reserve to cut interest rates by year-end. The strong economy and higher inflation have reversed those expectations, and the bond market now views an interest rate hike as the more likely possibility.
Gold
The prospect of higher interest rates is the reason experts are giving for gold’s retreat in the second quarter. Gold fell 15% during the quarter as investors opted for higher yielding bonds. Nonetheless, the price of gold remains nearly 80% higher than it was two years ago.
Bond Market
The war in Iran and the stronger-than-expected job market led to an up-and-down quarter for the bond market. The Morningstar U.S. Core Bond Index managed to return a modest gain of 0.66% for the quarter and is up 0.76% year to date. Shorter-term bonds, where Boulay Wealth continues to focus client holdings, rose 0.50% for the quarter, as measured by the Morningstar 1-3 Year Core Bond Index. That index is up 0.86% for the year.
U.S. Stock Market
The stock market’s concerns about AI profitability and the war in Iran faded in the second quarter as enthusiasm for the AI infrastructure buildout returned. The stock market rebounded with a rally that was powered by smaller tech companies tied to data storage and energy supply for AI data centers.
Overall, U.S. stocks gained 15.5% in the second quarter, as measured by the Morningstar U.S. Market Index. Year to date, the index is up 10.7%. Tech-heavy growth stocks continued to lead, with the Morningstar U.S. Market Growth Index gaining 23.5% for the quarter. More defensive stocks rose 5.5%, as measured by the U.S. Market Value Index. While it is nice to see the strong gains in growth stocks, the performance differential between growth and value stocks has kept the trading team busy making sure client portfolios stay within their strategy’s risk parameters and not get too overweight in these hot tech stocks.
Global Markets
Global stocks also rebounded from concerns about the war in Iran. The Morningstar Global Markets ex-U.S. Index returned 13.76% for the quarter and is up 13.18% year-to-date. The Morningstar Emerging Markets Index returned 22.51% in the second quarter and is up 22.11% for the year.
Trump Accounts
July marks the rollout of Trump investment accounts, which are intended to help children get a head start on retirement savings. Families may contribute up to $5,000 per year to a child’s account until the child turns 18. The government will contribute $1,000 to accounts for eligible children born between 2025 and 2028. Because the account converts to a traditional IRA when the child turns 18, it is not well suited for college funding or other shorter-term goals. Many details remain to be determined, but accounts can be set up through the app, which can be downloaded at trumpaccounts.gov. Contact us if you would like to discuss whether funding a Trump account is the best use of funds for a young person in your life.
The Consumer Price Index measures changes in the cost of living by tracking prices for a basket of consumer goods and services.
The Morningstar U.S. Core Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with an approximate five-year maturity. The Morningstar 1-3 Year Core Bond Index measures the performance of fixed-rate, investment-grade bonds with maturities between one and three years. The Morningstar U.S. Market Index measures the performance of company stocks comprising 97% of the tradable universe of U.S. stocks. The Morningstar U.S. Growth Index measures the performance of U.S. stocks with characteristics that meet Morningstar’s growth criteria. The Morningstar U.S. Value Index measures the performance of U.S. stocks with characteristics that meet Morningstar’s value criteria. The Morningstar Global Markets ex-U.S. Index measures 97% of stocks in developed and emerging markets outside the U.S. The Morningstar Emerging Markets Index measures 97% of stocks in countries defined as emerging markets.
The opinions expressed in this article are those of the author and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and is not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees; one cannot invest directly in an index.