Quarterly Perspective for 2Q.25

Quarterly Market Summary

Summary

What a turnaround!  Stocks soared to a 10.9% quarterly return last quarter after President Trump reversed himself on tariffs.  The “Liberation Day” tariff announcement on April 2^nd caused a further 12% one-week sell-off after stocks had already fallen 8% from their February 19^th highs.  Investor sentiment was grim.  Then, on April 9^th, tariffs on foreign-made goods were largely rescinded for the time being.  Stocks rose over 8% that day.  Gradually, investors began to believe that their fears about inflation and recession might be overblown.  They reasoned that if the administration was simply employing an aggressive negotiating tactic and never really planned on going through with tariffs of 50% and higher, maybe they aren’t as reckless as first thought.  The rally really got going after Microsoft’s surprising large earnings beat on April 30^th and semiconductor giant Nvidia’s assurance in May that the AI race was just getting started. 

As a result, technology was the big sector winner last quarter with a 22.9% gain, but industrials also gained over 12%.  Defensive industries like consumer staples (no growth), health care (RFK Jr., Medicaid cuts), and energy[1] lagged badly.  U.S stocks are up 6.2% through June 30th.

Foreign stocks have done much better.  In local currencies, world stocks rose 8.3% in the first half of the year.  Because the U.S. dollar fell sharply as global investors shifted assets out of U.S. markets, dollar-based investors earned nearly 11% more by investing overseas.  This finally provided some validation for proponents of international diversification after years of under-performance due to a strong dollar and a less advantageous industry mix[2].  Asian stocks gained the most last quarter led by China.  Lessening of trade frictions were good for everybody, but the U.S. and China benefitted the most. 

Bonds gained 1.2% last quarter.  This is big “cool down” after a strong (2.8%) first quarter.  Yields have steadied in a narrow range as investors weigh where inflation and tariff policy are going next.  Non-US debt continued to benefit from a weaker dollar.  Private credit and mortgage bonds also outperformed.  Municipal bonds were once again the worst bond sector.  They have become very cheap now, and many bond market experts are saying that this is the time to buy.

Alternative assets such as gold and bitcoin have been choppy, but both have had multiple surges to new highs this year.

Activity

The second quarter came in like a shark and went out like a kitten.  The first six trading days of the quarter were wracked with tariff fears and selling, then we got the policy reversal, and then investors increasingly traded stable assets for those that had more upside potential.  The key consideration for performance was how strongly one altered their positioning in March in anticipation of tariffs and how quickly one reversed those changes in April or May once the tariff scenario changed.  We made moderate risk-off moves in March.  By early May we had repositioned portfolios back toward risk assets, but not quite as much as if the whole thing hadn’t happened in the first place.  Policy volatility continues to make this an exceptionally challenging (but not necessarily bad!) time to invest.

Outlook

Investors have learned, over the past fifteen years, that if you get a meaningful dip in stock prices you better be a buyer.  The vehemence with which bearishness switched to bullishness has reinforced the notion that selling is dangerous – you are probably going to have to buy back whatever you sell, and the price may well be higher then.  There are some large tariffs set to take place early next month which if implemented would likely cause stocks here and overseas to fall, but as I write this on July 17, 2025 – the stock market isn’t putting much stock into those concerns.  Nobody wants to be the guy who sold out and now has egg on his face because the tariffs were just a bluff and never went into force.  In essence the market is playing a giant game of chicken, so to speak.  I hope it doesn’t have to blink this time.

Commentary - Warren Buffett and Michael Saylor

This seems like an appropriate time to appreciate the career of Warren Buffett, the chairman of Berkshire Hathaway and perhaps the most famous and successful investor of the past 75 years.  Mr. Buffett announced in May at the annual shareholders’ meeting that he was turning the chief executive officer role over to a successor.  The 94-year-old Buffett is probably most well-known for his stellar long-term returns, but to professionals his standout quality was his patience.  His best returns often came from stocks that had their best years long after Berkshire first purchased them.  Mr. Buffett exploited a huge behavioral weakness that investors have – the inability to accurately assess opportunities and risks that would take years instead or months to play out.  Time after time he would buy stakes in strong companies that were facing a near-term challenge, then hold them while the challenge was overcome and the stock returned to its upward trajectory.  A less appreciated but also important behavioral skill he possessed was the ability to avoid being drawn in by short-term market fads.  He would rather let cash accumulate on Berkshire’s balance sheet than overpay for a company just because it was doing well.  If you are patient, he argued, you do not have to pay top dollars for the best companies.  Eventually, they will come to you.  For example, he earned tens of billions of dollars for Berkshire by buying Apple stock during slumps in 2013 and 2016[1]. 

Warren Buffett’s approach is known as value investing, and it was the model for investing in the 20^th Century.  It was taught and is still taught in business schools and in the CFA program.  But value investing is not the way that most investing is done today.  Michael Saylor is the Executive Chairman of a company called MicroStrategy (now just Strategy), and he is a pretty good example the modern investment approach.  Strategy borrows money in the bond market and uses the proceeds from its borrowing to buy bitcoins.  This works because investors currently value Strategy at roughly twice the value of the bitcoins it holds.  Why?  Because there are many things you can do with bitcoins (including lending it to speculators for a tidy fee) and because the Trump Administration is very crypto-friendly and is likely to approve even more uses for bitcoin.  Since bitcoin was invented back in 2008 it has both risen tenfold and lost two-thirds of its value several times.  If Buffett’s edge is patience, Saylor’s edge is fortitude.  He can psychologically withstand brutal downturns that the vast majority of investors cannot.

I bring up this comparison not because either Buffett or Saylor is a good or smart person or has the better approach but because I believe both are a product of their times.  Warren Buffett was born during the Great Depression.  He saw both a World War and decade long periods of time where stocks made investors less than nothing after inflation.  He was influenced by Benjamin Graham’s idea of “Margin of Safety” which is decidedly a “First Principle - Don’t lose money” kind of philosophy.  On the other hand, Michael Saylor started MicroStrategy in 1989.  His investment career coincided with relative political stability and huge gains in the market punctuated by brief downturns in 2000-02, 2007-09, and even shorter ones in 2020 and 2022.  He is a very successful investor during a climate where no matter how far asset prices fell, they always came roaring back in fairly short order.  Those who picked the right asset (Apple, Nvidia, bitcoin) and went “pedal to the metal” made the most money – if they didn’t lose their nerve.  Such is growth investing, and its superiority this century has been amazing.

Maybe this is how the rest of the decade will go.  Maybe this is how the entire twenty-first century will go.  All I can say is that I can’t believe that it will, and I cannot professionally or personally invest as if I think it will.  As a student of market history (going back two centuries), I have recognized a pattern of increasingly speculative excess leading ultimately to very deep busts.  The success of Strategy by itself doesn’t say anything about whether or not this is the pre-bust part of a great market cycle.  Saylor may just be one of those investment geniuses that arise during both good periods and bad.  But coupled with the rise in ways to outright gamble on the market, especially the explosion in options and other forms of leverage and online trading forums, I am convinced that this is one of those speculative eras that will not end well.

That said, I also know that it is beyond my ability to predict when this will happen, so getting super defensive and waiting is just not an option.  I know people who have tried that.

Investing always involves risk, but today it involves more risk than usual.  Not just because prices are high historically[i], but because there is a similar embrace of risk-taking and risk-takers that I’ve read about in the late 1800s and the 1920s and I lived through in the late 1990s.  Moreover, this higher risk behavior is taking place at the same time as America’s policy framework is undergoing significant changes not seen since the 1930s, and at a time where corporate America is betting VERY BIG on artificial intelligence.  Those are important topics whose implications I’d like to address in future Commentaries, but don’t have enough room left in this one.

So, in conclusion I’d like to thank Warren Buffett for his contributions to the field of investment analysis and management as well as to the pocketbooks of all of us who have invested over the last forty or so years.  I’d also like to thank growth investors like Michael Saylor who remind investors more psychologically sympathetic to value strategies, like myself, that growth tends to perform a lot better than value when the financial and geo-political winds are at your back.    I hope that this continues to be the case.

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DISCLOSURE

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[1] He was a heavy seller in 2024 at prices 6-9 times higher.

[i] Stock are statistically expensive, but that has been the case for most of the last forty years, so this fact has almost no predictive value.

[1] Energy investors always assumed that a war in the Middle East would send oil prices soaring.  When the war came and went and prices were only briefly affected, the “conflict premium” declined considerably.

[2] Far more of the U.S. market is in technology, the best performing sector of the last fifteen year, than foreign markets contain.