Reflecting on the second quarter of 2025, the tumultuous period brings to mind the quote, “There are decades where nothing happens, and there are weeks where decades happen.” If you were to focus on quarter-end performance figures across asset classes, the broadly positive returns would mask what was anything but an uneventful quarter, dotted with such “weeks.” While not an exhaustive list, the quarter began with drastic changes in trade and fiscal policy, followed by further geopolitical unrest in the Middle East and the reemergence of bond vigilantes. These and other developments were major drivers of market volatility. Yet, investors who stayed the course and focused on the long term, rather than reacting to short-term noise, were ultimately rewarded and may have hardly noticed the turbulence by quarter’s end.
Sweeping shifts in trade policy
On April 2nd, dubbed “Liberation Day”, the United States unveiled a sweeping shift in trade policy, introducing a raft of new and increased tariffs on countries around the world. The policy shock rattled global investors and, within days, sent markets into a nosedive, with the S&P 500 declining roughly 11% and U.S. Treasury yields starkly higher across the curve. In the wake of these tariff announcements and sharp drawdown, market participants’ odds of recession increased based on the expectation of reemerging inflation, reduced consumer spending, and lower earnings outlooks, all of which added to the market’s heightened volatility. Markets were given a reprieve and rebounded on April 9th, when the new tariff policies were paused to allow time for further negotiation. While the trade policy shift initially spooked markets, those who reacted by selling into the downturn would have missed a swift rebound and strong performance through quarter-end. By late June, the S&P 500 had fully recovered its early-April losses and posted solid gains (+10.94%), supported by resilient earnings, easing inflation, and renewed confidence in the U.S. economy. This episode highlighted the risks of reacting to short-term policy shocks in what remained a fundamentally supportive environment.
Fixed income market signals
Fixed income markets also flashed warning signals in the second quarter. Yet, if you were to look at the difference between the 10-year U.S. Treasury yield at the end of March and the end of June, 4.21% and 4.23%, respectively, the quarter appeared relatively quiet. Investment-grade credit spreads even continued the trend of tightening, beginning the second quarter at 94 basis points and ending the quarter at 83 basis points. But in the interim, bond vigilantes made their displeasure known and sent fixed income volatility higher along with equity counterparts. Investment-grade corporate credit spreads quickly widened from 94 basis points at the beginning of the quarter to reach a nearly two-year high of 119 basis points intra-quarter. U.S. Treasury yields initially declined following the new trade policy announcement, with the 10-year yield hitting a low of 3.99%. However, Fed Chair Jerome Powell’s statement, which indicated Fed actions were on pause until receiving greater clarity on the impact of tariffs, sent Treasury yields starkly higher and the 10-year yield to a high of 4.49%. The vigilantes struck again when the 20-year U.S. Treasury auction met tepid demand amid the increasing deficit, sending the tenor’s rate to an 18-month high of 5.13%. Yet, like the 10-year yield, the 20-year settled back down to 4.78% by quarter end. As with equities, the fixed income market’s overall direction reverted to reflect the strong fundamental backdrop. Yields returned to roughly what they were at the start of the quarter, and credit spreads completely recovered and tightened overall. This market dynamic allowed most areas of fixed income to post positive, albeit modest, returns in the second quarter, showcasing another period where patience in a choppy market was rewarded.
Global tensions
Following the tariff-induced turmoil in April, heightened tensions in the Middle East eventually boiled over with Israel and Iran trading attacks and drawing in action from the United States. The initial wave of attacks in the middle of June triggered fears of ancillary attacks and the possible closure of the Strait of Hormuz, which daily sees one-fifth of the world’s oil production pass through. As a result, Brent crude prices spiked approximately 11%, airline stocks declined, and safe-haven assets, primarily gold, rallied. Fears of a prolonged conflict fed into market participants’ and central bank worries of higher inflation and possible stagflation. Fortunately, those concerns were relatively short-lived as tensions eased in late June, and the conflict remained contained without escalating further. Easing tensions allowed oil prices to drop to pre-conflict levels, resulting in only a limited impact on the direction of the broader market. This episode serves as a reminder to investors of the importance of staying informed about global events while also maintaining focus on long-term objectives.
The wisdom in sticking to your plan
Our constant news cycle has allowed us to be almost instantly informed about events both domestic and abroad, but rarely are events worth immediate action by long-term investors. The second quarter’s events were no doubt market movers and volatility producers. Still, ultimately, the prevailing fundamental backdrop continued to drive the market higher and made this quarter’s events just a blip in the chart. As always, “past performance is not indicative of future results,” but investors with a comprehensive long-term plan based around a diversified portfolio have typically weathered the market’s turbulent “weeks.”
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