Market Thoughts August 1,2025

Another strong month for the S&P 500 is in the books. The S&P 500 tacked on another 2.2% to get the YTD figure up to 8.4%.  The NASDAQ was even stronger at 2.4% and 10.6%, on the back of continued strength from all but two of the Mag 7.  Still, when you look at the rest of the U.S. market the month was not all that impressive.  Value stock indices rose only half of one percent.  Small and midcap stocks rose 1.5% but were very weak over the last five trading days.  It just seems like the market has done almost all it can with the good news it has received over the past three months. 

International stocks lost money in July.  The dollar had a pretty strong month as it rebounded from the oversold levels it hit in early July.  Both Japan and Europe made trade deals with the US that appear to be very one-sided, which has positively changed the near- term sentiment towards the dollar.  It will be interesting to see if those agreements are actually what they appear to be (or merely just “frameworks” for a deal).  It would be fairly shocking if the people of the EU countries accepted the terms as they now stand. 

India had a very rough month.  President Trump put a 25% tariff on India to punish it for doing business with Russia.  Next to Brazil, who Trump punished even more because he is friends with Bolsonero, India was the worst performing significant market.  You have to think that every country is thinking about how to reduce its vulnerability to U.S. trade policy.

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This morning’s Unemployment Report was a shocker!  The 73,000 July figure was disappointing as 110,000 was expected, but it was hardly a market mover in and of itself.  The big negative market reaction was for the revisions to the previous two months.  May was revised down from 144,000 to 19,000, and June from 147,000 down to 14,000.  Those were MASSIVE revisions!  The whole narrative flips now from “tariffs don’t seem to be costing the economy anything, so we don’t have to worry about the new ones going into effect in August” to “everything we thought was wrong. Tariffs have been costing the economy jobs for the last three months and now they are about to get even worse”.  This is to say nothing about the nature of revisions so large – was it poor data collection in the wake of DOGE cuts or is data being manipulated to appear good upon first release and then the true number is quietly revealed later?  In either event, global equity markets are going to struggle with this news, while high quality fixed income should benefit from rates that are almost certainly going lower.

The dollar, which rose almost 4% in July, has given back 1.2% so far this morning.  This is enabling foreign equities to lose less than the U.S. for the first time since late May.  I suspect there will be those that see this morning’s action as a dip to be bought, but I would agree only if I knew that the proposed tariff increases this month were to again be postponed or rescinded.  Either way, I believe bonds are going to see inflows and gold should also benefit as a September rate cut seems all but assured.  Some of the hotter areas of the stock market, like semiconductors and the fintech/crypto space, will probably need to consolidate a bit.

One other thing.  The most recent Russell ETF reclassification puts Amazon, Alphabet, and META into the Russell 1000 Value Index.  If you thought these were growth stocks you can rest easy, they are all still in the Russell 1000 Growth Index as well.  If it was your hope that you could use the Russell indices to help you diversify your portfolio and thereby reduce risk, however, I have bad news.  If there is a significant technology downturn like there was in 2000 and investors rotate to other industries, your passive value fund is not going to save you.

This might be the thing that revives the municipal bond market.  Munis have been plagued for years by low coupons and long durations.  This year their prices fell into the dirt-cheap category as municipal issuers sought to float their bonds before the tariffs and the budget bill went into effect, so supply became yet another headwind. Now we may finally be seeing the kind of slowdown that makes these generally high-quality fixed income securities the toast of the bond market again.  Tax equivalent yields on investment grade munis are near 7%, whereas on corporate bonds they are less than 6%.

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