Red, White, and Blue
With July 4th upon us, and with the coming of that date this year, we begin a year that will culminate on July 4th, 2026, at which time we will celebrate our nation’s 250th birthday. This should be a time for patriotism and celebration that all Americans should be proud of. To that end, I am going to alter the normal statement commentary slightly and focus a bit on our nation – but no worries, I will report on the markets and the economy as well. I would like to start by giving credit to this idea to a blog/commentary written by Brian Wesbury, chief economist at First Trust, called Monday Morning Outlook. Each year at this time, Brian writes about America, and something called its 3.5 second miracle. With apologies to Brian, I am including a portion of that article here. It is part of a speech President Reagan gave at the Commencement Address at the University of Notre Dame on May 17, 1981….
“This Nation was born when a band of men, the Founding Fathers, a group so unique we’ve never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers – fifty-six men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.”
“They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you’re about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.”
“This experiment in man’s relation to man is a few years into its third century. Saying that may make it sound quite old. But let’s look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days – maybe on leap years we could have an intermission – this idea that is the United States wouldn’t appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”
If that was true in 1981, how much more is it today? Consider how our technology and knowhow leads the world and drives virtually everything, whether here or abroad. American exceptionalism is alive and well, especially those pillars of our society such as the freedom of speech and worship, the ability to own property, the freedom to vote in elections at every stage of our political system, and, perhaps not as important in the grand scheme of things, the freedom to invest. Yes, we are divided politically although that is nothing new and will continue to be so in the future, but that is also part of what makes us strong – the ability to disagree but still take pride in our nation. There is a reason the rest of the world still wants to come here!
With a nod to patriotism, let us review our economy and markets.
Financial Markets
On the fourth of July, fireworks can be described as dazzling, booming, shimmering, sparkling, and glowing and so can June’s market returns! Just during the month of June, the Dow gained 4.47%, the S&P 500 gained 5.09%, the S&P 400 added 3.58%, the S&P 600 rose by 4.04%, and the NASDAQ added 6.64%. The Bloomberg U.S. Aggregate Bond Index bounced back in June and added 1.54% on the month. As the 1978 hit song by The Cars said, “let the good times roll”!
All this talk of international stocks dominating domestic stocks may hold true on a year-to-date basis, but that has certainly not been the case over the past two months. May saw U.S. stocks outperform the EAFE and that held true in June as well, as the EAFE gained just 2.09% during the month. Over the past fifteen years or so, domestic stocks have trounced their international counterparts as the S&P 500 has averaged 14.9% per year versus the EAFE at 8.0%, and the U.S. share of global market capitalization stands at 64.0% as well. Given the front-loading of imports this year, before the tariffs kicked in, it should have been no surprise that international equities would outperform, but now that that effect has worn off, is it a return to normal? Only time will tell, and high-quality international equities can be a good diversifier, but for now give me the good old USA! For more information, see the end of this commentary.
The Economy
The American consumer (and the U.S. government) drives the world economy because the U.S. economy is the biggest and strongest in the world. While our growth, as measured by GDP, has not always been the fastest, it has been the most resilient. This is why we have not had a recession, other than the short-lived COVID-related one, since the Great Recession. The adage “when America sneezes, the rest of the world catches a cold” has largely held true. This year, economic expectations, and measurements, have been all over the place – GDP down in the first quarter, strongly positive in the second, job numbers relatively, and somewhat unexpectedly strong, allowing the economy to essentially remain at full employment, consumer sentiment up then down but spending strong, inflation falling, and manufacturing data and sentiment weak, but new factories coming. Economic weakness (rising inflation, falling job numbers, weak consumer, etc.) due to tariffs has not materialized yet and may not (although higher tariff revenue has materialized), and the stock market, after a brief weak patch, has hit new highs. Because of this the Fed has held rates steady, although there does appear to be some room for a couple rate cuts. What has not been mentioned here yet is deregulation that is coming in the second half of this year and into next. That should have the effect of boosting small and large businesses and spur the economy to greater growth. Will it all last? Only time will tell, but the U.S. is weathering the storm this year reasonably well and I would not count America out!
GDP (Gross Domestic Product) – Economic activity, as measured by GDP, contracted in the first quarter by 0.5% according to the third estimate. The contraction was mainly due to the spike in imports during the quarter due to fear over tariffs. Second quarter activity will likely be a reversal of that, as imports fell dramatically during the quarter. GDPNow is currently forecasting a growth rate of 2.6% (as of July 3rd) in the second quarter, while many economists think the number will eventually settle between 3.0% and 4.0%. Full-year estimates, however, show a slowing economy, and generally slot between 1.5% and 2.0%. Longer-term estimates still point to a steady, if unspectacular rate in the 2.0% range, similar to pre-COVID levels.
Inflation – Inflation continues to surprise – not so much due to the actual rate, but because many expected the rate to rise because of the tariffs. However, that just is not the case. CPI came in at 2.4% in May, and Truflation was running at 1.98% as of July 3rd. All is quiet on the inflation front. Contrary to what many believe, the tariffs will likely have a minimal impact on domestic inflation. Yes, some prices will rise, but that means that consumers will have less to spend on other items, effectively causing their prices to fall, offsetting the initial reaction. Because inflation is running cool, the Fed does have some room to cut interest rates (perhaps by fifty basis points in total this year), and that should only fuel the economy. In specific good news on the inflation front, both Denny’s and Waffle House have recently removed the egg price surcharge at their restaurants! From an inflation standpoint, the U.S. is in a good position.
Unemployment – The economy added 147,000 new jobs in June and the unemployment rate settled slightly to 4.1%. Both readings were better than expected and hardly the recipe for a recession! While job gains were made in state government and health care, the federal government continued to shed positions. The number of jobs held steady in many private sectors, including manufacturing, and that is better news than expected as well. In addition, average hourly earnings grew by 0.2% in June and 3.7% over the past twelve months. More good news for U.S. workers. Madison saw its unemployment rate tick higher in May to 2.8%, while Wisconsin’s rate held steady at 3.3% in May.
The Fed Watch
The title of this paragraph is aptly named, if for no other reason than that the Fed is on everyone’s watch list all the time. Certainly, that is the case now and not just for investors and economists, but also for President Trump, who is calling on the Fed to cut rates. He may have a point, as inflation has cooled to the point where keeping rates elevated could start to be a drag on the economy. The Fed is focused on the potential for higher inflation due to the tariffs, which is why they have not cut rates, but that seems to be misguided thinking, as tariffs are having a minimal overall impact on prices. The money supply, as measured by M2, is a better metric for them to focus on (historically they did prior to the Great Recession). When it surges, you can bet inflation will follow, and vice versa. The rate surged during and after COVID and inflation followed suit. Since 2022, however, the surge has ended and the overall rate of growth in M2 has been tame, and inflation has come down. The Fed does have room to ease monetary policy slightly, and should do so once or twice this year at 25 basis points each, with the first likely in September. This should benefit the U.S. economy by spurring more growth.
Tariffs
While tariff talk has settled down, it is due for a boost in July as the 90-day pause comes to an end. However, the likelihood of stiff tariffs being implemented is quite low, and further delays will almost certainly be put in place. In addition, several trade deals are being worked on, and according to Treasury Secretary Scott Bessent, the U.S. could have most trade deals completed by Labor Day. That would be a boost to the economy and the markets. It should be noted that part of the benefit of the tariffs is new production in the U.S., although it will take time for things to get built and ramp up. In addition, tariff revenue continues to surge, as the U.S. brought in approximately $20.5 billion in June, $24.2 billion in May, and $17.4 billion in April, with year-to-date numbers exceeding $110 billion this year. Both the new manufacturing and the tariff revenue are a win for the U.S., especially as inflation remains muted.
Outlook/Summary
With the passing of the July 4th holiday, we have entered our nation’s 250th year and this should be a cause to celebrate! Economically speaking, things are moving ahead, the markets are at all-time highs, and jobs are plentiful. America remains free and our exceptionalism, grown out of our unique beginnings and Constitution, remains strong, but there is more work to be done. Reduced taxes and regulations should help spur economic growth, but growing budget deficits (here and abroad) loom as threats to that growth. While the markets have been volatile, they once again are at record highs, which also creates issues due to elevated valuations. With all the economic news, both good and bad, now is not the time for us to take our eyes off the ball and settle for recent results. We continue to stay abreast of economic activity and will adjust accordingly. Our approach remains consistent – seek downside protection first, and then upside returns without trying to time the markets.
Happy 249th birthday to the United States of America – the land of the free, because of the brave! We thank and salute all of you who have served our nation and kept us free! USA! USA! USA!
Should you like to discuss your portfolio or strategy or establish a new relationship, please call the Wealth Management division of Lake Ridge Bank at (608)826-3570. We look forward to speaking with you.
Market/Economic Data
As of June 30th, 2025…. Unemployment data is through June for national, May for Madison and Wisconsin (both preliminary); inflation data is through May:
| Index | Month Return | YTD Return | Index | Month Return | YTD Return or Current |
|---|---|---|---|---|---|
| DJIA Industrials | 4.47% | 4.55% | EAFE | 2.09% | 17.37% |
| S&P 500 | 5.09% | 6.20% | Blm US Agg Bond | 1.54% | 4.02% |
| S&P 500 Equal Weight | 3.43% | 4.82% | Inflation (CPI All-items) | 0.1% | 2.4% annualized. Truflation 1.98% 7/3 |
| S&P 400 | 3.58% | 0.20% | U.S. Unemp. | 4.1% | 147,000 new jobs |
| S&P 600 | 4.04% | -4.46% | Wisconsin Unem. | n/a | 3.3% |
| NASDAQ | 6.64% | 5.85% | Madison Unemp. | n/a | 2.8% |
