Underreacting and then Overreacting to Policy Shocks
As you make your way through Terminal 5 in Heathrow airport, there are plenty of opportunities to buy a T-shirt bearing the slogan “Keep Calm and Carry On”. The wearer of such a garment, upon their return to the United States, is presumably advertising the idea that a visit to the blessed plot has bestowed upon them the ability to weather all manner of shocks with equanimity.
When it comes to financial markets, however, the British could learn calmness from the Americans. The U.K. gilt market, petted and coddled by timid politicians, seems to descend into turmoil under the mildest provocation. Meanwhile, U.S. markets, hardened by years of unruly words and abrupt policy changes from Washington, does indeed seem to “keep calm and carry on”.
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10:44
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10:44
The Investment Implications of a Falling Dollar
Despite very significant shifts in U.S. economic policy and major geopolitical events, investors can look back at the first half of 2025 with some satisfaction. Through July 3rd, the S&P500 provided a total return of 7.5% for the year, despite being on the brink of a bear market just three months ago. Fixed income has also done well, with 10-year Treasury yields falling by 23 basis points, generating a 4.2% return year-to-date while high-yield bonds have delivered 4.8% on the back of a further narrowing of already tight spreads.
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9:45
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9:45
OBBBA and a Cold, Hot, Cold Forecast
On Tuesday, we will release our third quarter 2025 Guide to the Markets. On Wednesday, we will host conference calls with financial professionals to discuss the outlook.
It’s an outlook dominated by the impact of dramatic policy changes on a relatively slow-growing U.S. economy. The result, in the short run, may resemble a wave, as the economy cools down in the second half of this year, heats up in early 2026 and then cool down again. However, in the long run, the net effect of these policy changes could result in an economy with slightly slower growth and higher interest rates than seemed likely at the start of the year. This being the case, it is hard to justify this spring’s rebound in U.S. stocks to new record highs less than three months after teetering on the brink of a bear market. Consequently, investors would still be well-advised to seek broader diversification in areas such as international equities, value equities and alternative assets.
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9:29
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9:29
Tariffs and Inflation
Investors this week will be focused on the implications of the U.S. attack on Iranian nuclear facilities. While this is clearly a very significant event from a geopolitical perspective, it may be less important for financial markets.
The key issue is how Iran responds. One often-mentioned scenario is that they could try to close the Strait of Hormuz. Such a move would have a dramatic impact on world energy markets as roughly 20% of the world’s oil production moves through the Strait. However, this strategy would be highly counterproductive for Iran, first, because it would eliminate its own ability to export oil and second because it would trigger a U.S. effort to reopen the Strait that could further damage Iran’s depleted military capabilities.
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12:19
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12:19
Economic Sogginess and the Market Party
When we bought our first home, the builder neglected to mention that it was built upon a river. Of course a river at the bottom of a garden is a charming sight. Something that seeps up through the cellar is less attractive, and so, in due course, the builder was called back to install a sump pump. Our young sons were fascinated by the hole in the basement floor and the coppery water that flowed at the bottom and wondered whether, with the help of makeshift fishing poles, it could yield some fish.
Ireland