Content courtesy of Highland Investment Advisors’ Managing Director Adam Drake.
Market Performance
The US equity market posted positive returns for the quarter and underperformed both non-US developed and emerging markets. Value underperformed growth and small caps underperformed large caps.
US REIT (real estate investment trusts) indices underperformed equity market indices, but International REITs outperformed.
Within the US Treasury market, long term interest rates generally increased and short term rates decreased during the quarter. The yield on the 10-Year US Treasury Note increased 0.01% to 4.24%.
The Bloomberg Commodity Total Return Index returned -3.08% for the second quarter of 2025.
Economic Overview
Inflation and Tariffs
U.S. consumer prices increased by 2.4% in May compared to the same period last year, marking a slight uptick from April’s 2.3% rise. Core inflation, which excludes the more volatile food and energy components, climbed to 2.8% year-over-year, up from 2.5% in the prior month. Tariff-related pressures remain a concern, with Fed officials warning of "persistent" inflation risks from trade measures. With higher import costs, the burden is likely to fall somewhere along the line, whether absorbed by manufacturers, passed on to retailers, or ultimately borne by consumers.
U.S. Consumer Spending
Consumer spending grew at an annualized rate of 1.2% in 1Q25, down sharply from 4.1% in 4Q24. Factors indicating consumer fatigue include falling gas sales, declining auto purchases after a tariff-fueled buying rush earlier in the year, and broader unease over the economic outlook. Excluding autos, sales fell 0.3%, though retail sales rose 0.4% without the most volatile categories. The University of Michigan’s consumer sentiment index, released on June 27, rebounded from its near two-year low in May, marking the first increase in six months. However, the survey continued to reflect expectations of rising inflation and an impending economic slowdown. The data follows the June 26 revisions to U.S. GDP estimates, which reduced first-quarter consumer spending growth from a 1.2% increase to a mere 0.5%.
Job Pressures Impact Confidence
The U.S. unemployment rate held steady between 4.1% and 4.2% throughout the quarter, a range that remains historically low and is generally viewed by economists as near full employment. However, beneath these headline figures, signs of labor market weakness began to surface. In June, the labor force participation rate declined slightly, indicating that some individuals are exiting the workforce. This concern was reinforced by a sharp increase in the number of discouraged workers, those who believe jobs are unavailable to them, and a notable rise in continuing unemployment claims, which have reached their highest level in three and a half years. Additionally, the average hourly earnings growth on a year-over-year basis continued to decline in June, falling to one of its lowest readings over the past 12 months. These trends suggest a gradual cooling in labor market momentum.
As always, our focus remains on long-term goals and strategy, while keeping you informed of current market developments. Contact us if any questions!