There was no drop in the entertainment value presented during the second quarter. The first week of April saw the market take a big step backwards in the face of stiff new tariffs proposed by President Trump. Throw in military action by the US against Iran, the passage of the Big, Beautiful Bill and you have plenty of motivation for the stock market to seek shelter.  Despite the headlines the S&P and Nasdaq both found their way to record highs. The benchmark S&P was up 5.5% for the first six months of 2025. But it was not the Magnificent 7 stocks that led the way. That award went to Dollar General. AI continued to motivate investors but there was a growing awareness that consumers are spending more of their money on necessary and less on discretion.

Based on employment, or lack of it, the US entered a recession during the second quarter of 2024, came out in the fourth quarter, and then back into recession during the first quarter of 2025. While the June employment headline number was reported as a surprise to the upside, it was a big disappointment. 200,000 is the minimum number of new hires needed monthly to maintain a healthy US job market. The 140,000 reported number showed that half of the employment was hiring by state and local governments. Nonproducing jobs. There was further decline in factory and service jobs, weekly hours worked and average hourly income. While the government’s monthly employment reporting has become very suspect, the more reliable ADP number for June showed a job loss of 17,000. Historically, when there is a divergence between the government and the ADP numbers, the government number is later revised to mirror the ADP. 

There was much attention paid to the Federal Reserve during the second quarter. But the FED remained sitting on its hands, refusing to reduce interest rates. The FED has two mandates, inflation and employment. Both are continuing to drop. However, the FED has claimed another mandate and that is guessing whether possible tariffs might generate inflation. The FED appeared to have become an arm of the political opposition. The FED remained the only major central bank to not to be in a rate cutting cycle. The US bond market moved on without the FED and pushed short term rates below the FED target rate.

The greatest source of uncertainty in the financial markets remain the US Federal Reserve.

Historically, tariffs do not create inflation. Tariffs bring on global recession.

The rate of inflation continued to drop during the second quarter. Inflation would be below the FED’s 2% target except for the inclusion of shelter cost. Housing is approximately 40% of the inflation number. Owner Equivalent Rent reflects what homeowners would charge if they rented out their own homes to someone else. That number remained high and did not reflect the actual drop in home values across the country. 

Student loan debt will become a bigger news story. Borrowers were allowed to stop making payments on student loan debt in 2021 during Covid. Repayment of loans was scheduled to begin anew in 2024. Many borrowers chose not to do so. During the second quarter borrowers who were 90 days or more delinquent were for the first time since Covid reported to the credit reporting agencies. The next step is garnishment of wages.  An estimated ten million Americans will find themselves with a smaller credit score and paycheck by the fall of this year. That will have an impact on the US economy. Consumers had already begun pulling back on discretionary purchases even before this assault on credit scores.

The global recession continued to age. Europe is now two years into recession with no signs of recovery. China is in a depressed economy.  Deflation continued to defy efforts by the Chinese government to restart the economy. Chinese factories continued to produce more than could be consumed by Chinese consumers and the massive surplus of goods was dumped on the global market.  The Chinese real estate market continued to implode. The large real estate developers who fed on the national Ponzi scheme are now making their last stand with very little chance of success.  Chinese citizens who poured their savings into real estate have hunkered down and are showing no interest in helping revive the economy. The Chinese Communist party is facing a real threat to its power.

The US stock market will focus on company earnings reported out for the next few weeks. The Federal Reserve meets late July and is expected to hold rates steady. The Oak Springs portfolio continues to hold a 40% position in long duration US government bonds in anticipation the FED will be forced to cut rates.

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