Riding the Trade Winds

Welcome to July!  June was a gusty month for markets, with global trade negotiations and threats of a major war in the Middle East acting as unpredictable trade winds—propelling stocks to record highs but also threatening to capsize the global economy. Despite tariff talks, geopolitical tensions, and mixed economic signals, all mutual funds sailed through, posting strong gains. For July, we’ll need to navigate choppy waters, watching trade deadlines, inflation pressures, and potential storms in the Middle East. 

Major Drivers

Tariff Relief and Trade Optimism

A 90-day tariff rollback on China, Canada, and Mexico, gained momentum in June as Canada, which quickly rescinded the Digital Services Tax, targets a July trade deal with the U.S. The S&P 500 soared 11% in Q2, recovering from April’s tariff-driven sell-off. International markets, like Japan’s Nikkei, rose 8.9%, lifting the international stocks as global leaders signaled cooperation.

AI Boom and Economic Resilience

The U.S. is seeing a very strong 4.2% unemployment rate and steady consumer spending, despite the Q1 GDP contraction of 0.5%. A surge in AI demand, led by Nvidia’s chip sales, fueled tech-heavy indexes. International tech firms, supported by low international interest rates, also rallied, aiding international mutual funds.

Monetary Policy Strife

The Federal Reserve held rates at 4.25-4.50%, with the Atlanta Fed signaling no July cut due to economic uncertainty. The European Central Bank’s 2.5% rate continues to boost the European stocks. Unfortunately, inflation ticked up to 2.7% in May (above the Fed’s 2% target) and probably caused them to hold off on cutting rates.  President Trump and his economic advisors want an interest rate cut as they see the high interest rates holding back the economy.

Keeping an Eye on the Horizon

Trade Deadline Volatility

The July 9 tariff moratorium deadline is looming.  If talks falter (e.g., another major economy tries to impose different types of taxes like Canada’s DST), a 16% average U.S. tariff rate across all countries, could cause more uncertainty and choppy markets.

Inflation and Consumer Pressures

With inflation already above the targeted 2% (and even the whispered 2.5% target) the Federal Reserve will want to keep interest rates high to keep inflation at bay.  I do not see the Fed raising rates this year, but the lack of a cut could reduce US stock market returns for the rest of the year. Pay particular attention to unemployment rates and inflation.  If unemployment rates move up and/or inflation moves down, we could see a more rapid rate cut. 

Middle East

It is looking like the Israel-Iran ceasefire is holding.  It was amazing to watch the swings in oil prices and the role China played in keeping the Strait of Hormuz open.  However, the Red Sea is still seeing disruptions, straining supply chains, and potentially raising inflation if prolonged.

Based on my analysis, I’m shifting a bit more to the international markets.  I’m still positive on US centered mutual funds, but the lack of an interest rate cut in the near future and the uncertainty around tariffs creates additional risks for the S&P 500.  International stocks will continue to benefit from lower interest rates.  Keep investing!