Well, that was quite the turnaround for stocks—one of the quickest round trips we’ve seen in the past 50 years. In just seven weeks, stocks fell more than 20%, only to recoup those losses in the following eleven weeks. Wall Street’s mindset seems to have shifted from assuming the worst outcome from tariffs or inflation or the economy to imagining if these issues had a more positive outcome. Instead of asking, “What could go wrong,” as they seemed to in the first quarter, they began to ask, “What could go right,” in the second quarter.
Despite negative first-quarter GDP growth (-0.5%), investors remained optimistic, buoyed by reports showing that both consumers and corporations were holding up relatively well.
International stocks continue to be a bright spot among the asset classes, matching U.S. stocks in the second quarter and leading on a year-to-date basis—the first time we’ve seen this level of outperformance from international markets in several years. As expected, technology and related sectors dropped sharply in the first quarter due to tariff concerns, but they bounced back strongly as those fears eased.
High-quality bonds, which are sensitive to changes in interest rates, posted positive returns in the second quarter, adding to their first-quarter gains. Yields have drifted lower this year, albeit in a choppy fashion as investor concerns over economic strength have ebbed and flowed. High-yield bonds have also performed well, suggesting the stock market’s uptrend may continue.
Despite the volatility, most major indices appear to be on pace to deliver average returns for the year, as the table above reflects.
Portfolio Activity During the Quarter
By the start of the second quarter, we had raised cash allocations significantly in response to the sharp market sell-off. As markets rebounded in May and June, we gradually returned portfolios to fully invested positions.
In hindsight, it may seem inefficient to sell equities during the downturn only to buy them back shortly afterward. However, it’s important to remember that every 40% bear market begins as a 10% correction. In order for FSA to protect the portfolios from losses greater than 10% to 15%, we have to take action BEFORE markets are down more than 10%. Our primary goal is to avoid large drawdowns that could jeopardize your retirement goals. We accept the occasional whipsaw in pursuit of steady returns and protection from severe market downturns like the 2000 tech bubble or the 2008 financial crisis.
Currently, portfolios have substantial allocations to large-cap and growth stocks, favoring technology over energy, healthcare, and financials. All strategies include exposure to foreign funds, which have been strong performers this year. Fixed-income allocations remain evenly split between high-yield and high-quality intermediate bond funds.
For clients unfamiliar with our passive investment options, we manage three strategies that maintain consistent, unchanging allocations across various assets. While they don’t employ the FSA Safety Net® approach, these strategies held up well amid recent volatility, supported by international equity exposure and an allocation to gold. Please contact your advisor if you’re interested in learning more about them.
Outlook Through Year-End
From a technical standpoint, the market looks resilient. Stocks have recovered from the spring sell-off and are now above key trendlines (see chart below). The Value Line Arithmetic Index, which reflects the average stock, also shows healthy momentum, though not as strong as its mega-cap dominated cousin (the S&P 500 Index).
Historically, we have entered a seasonally weaker period for stocks, but investing against a market hitting new highs is rarely wise.
Fundamentally, uncertainty remains. Tariffs are still in play, with news headlines shifting day by day. President Trump continues to press the Federal Reserve to lower interest rates, though economic indicators on employment and inflation offer mixed signals. Meanwhile, the recently passed “Big Beautiful Bill” will need time to reveal its effects on corporations and workers.
These uncertainties are likely to keep investors on edge and markets volatile through the second half of the year.
Portfolio Updates
Please note: Because we manage client portfolios individually, your holdings may differ slightly from the averages described below.
Strategies Using the FSA Safety Net®
Income (Strategy #1)
The Income Strategy posted modest second-quarter gains, with contributions from both high-yield and high-quality bonds. Bond markets held up well during the stock market sell-off, requiring few changes. Current allocation:
• 50% high-yield bond funds
• 15% high-quality bond funds
• 30% defensive/eclectic bond funds
Income & Growth (Strategy #2)
As stocks recovered, we increased equity exposure from 0% to 40% in May, including 10% in international funds. Bond holdings remained steady at 58%, with a minimal 2% money market allocation.
Conservative Growth (Strategy #3)
Equity allocation dropped to 10% at the market lows and climbed back to 70% by late June (including 10% in international funds). Bond funds represent 20% and money markets 10%.
Core Equity (Strategy #4)
By the April lows, equities had been reduced to 20%. As the market rebounded, allocations rose to 90%, with a mix of S&P 500-type funds, international (15%), and technology funds (5–10%). Money market levels are roughly 10%.
Tactical Growth (Strategy #5)
FSA Safety Nets® triggered significant reductions in April, cutting equities to 30%. As markets recovered, equity positions were rebuilt, primarily in large-cap U.S. stocks, with added exposure to international, communications, and financial sector funds.
Active Strategies WITHOUT the FSA Safety Net®
Sector Rotation
At the market lows, this strategy held 64% equities, focused on defensive sectors. As the quarter progressed and stocks rallied, it gradually shifted to new leadership sectors. As of the July rotation, it holds three technology-related sectors, plus telecom, leisure, and utilities.
Global Rotation
This strategy was 50% invested at the lows and has since added international and large-cap growth funds. Current allocation:
• 50% U.S. large-cap growth
• 30% foreign funds
• 20% money market
Strategies That Remain Fully Invested Through ALL Market Cycles (Passive)
Global Balanced
Passive strategies fare well in markets that are trending higher but have sharp declines that reverse quickly. This conservative strategy weathered the downturn well and captured gains on the rebound, benefiting from passive diversification.
Global Moderate
Diversification helped this strategy as foreign stocks lead the way, followed by foreign bonds, both assets boosted by a falling dollar. Secondly, since this strategy maintains its allocations among its different fund components, the portfolios participated in the subsequent recovery.
Global Growth
Despite having a 90% equity allocation, this strategy performed well thanks to its diversified asset mix, including foreign stocks and gold, which softened the April decline and fueled gains in May and June.
As always, please contact your advisor if there have been any changes in your circumstances that could affect how we manage your portfolio.
Ronald Rough, CFA
Chief Investment Officer
Disclosures are available at www.fsawealthpartners.com/disclosures/market-update.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.fsawealthpartners.com/disclosures or by calling 301-949-7300.
