Plus, a strong year for stocks to date, a weakening jobs market and the Federal Reserve’s assessment of inflation.
The U.S. Semiquincentennial is here! Happy 250th birthday, America! I hope you are looking forward to a long weekend of food, fun, fireworks, and celebrations with friends, family, and fellow soccer fans.
According to the National Retail Federation, planned per-person Fourth of July food spending will hit a record high of $94.41 this year. Nevertheless, consumers are undeterred about these costs, as early receipts show spending will hit a record in honor of the big milestone. Likely folks are feeling a bit better as prices at the pump are down to an average $3.85 per gallon nationwide, down from $4.32 a month ago with Iran tensions easing a bit. (Hard to believe I am excited about a $3-handle on gas prices but this is the world in which we live).
Less encouraging was this morning’s jobs report, which showed the U.S. economy added just 57,000 jobs in the month of June, and prior month reports were cut by 74,000. This means the average monthly change over the last 12 months was just 36,000 jobs.
This could be a worrying sign that AI is impacting hiring and that this year’s much touted rebound in the job market from 2025’s trade and tariff angst is less robust than headlines would have us believe. Hiring in oil and gas, construction, manufacturing, retail, transportation, financial services and the government sector were modest or flat. Meanwhile, the leisure and hospitality sectors took a harsh 61,000-job hit. While the unemployment rate fell to 4.2%, it did so because the labor force is shrinking, and employment fell among people in their prime working years. Average hourly earnings rose 3.5% year-over-year, less than the annual rate of inflation.
Financial markets closed the first half on a hot note, with the Dow gaining 8.9%, the S&P 500 Index up by 9.6% and the Nasdaq higher by 12.8% over the first six months of the year. U.S. small caps had an even more torrid pace of gain, rising close to 22% year-to-date.
Semiconductors and AI stocks were the stars of the show in the first half of the year, though in the last days of the quarter, money was rotating into industrials, financials and health care. I would say this is more valuation fatigue than anything serious, but the paranoia over the risks of a tech bubble continues to be a market narrative. Bond yields have been steady but still higher than ideal with short-term rates hovering slightly above 4% and the 10-year note at just over 4.4%. Notably, emerging market stocks were the best place to have your capital in the first half, and on a trailing 12-month basis.
Speaking at the European Central Bank’s annual Forum on Central Banking in Sintra, Portugal, Fed Chairman Kevin Warsh said, “Expectations of inflation over the first four weeks of this period have come down, inflation risks have come down.” It was a relatively optimistic tone, which the market read as implying an underlying support for maintaining the current level of policy as opposed to rate hikes.
Of course, given Warsh’s more dovish-leaning disposition (at least more recently), the chair may be inclined to downplay the potential for and conversation around rate hikes, despite the continued drumbeat of alarming inflation data. At least the disappointing jobs report will give the Fed cover under their dual mandate of price stability and maximum employment to hold the line on interest rates at current levels, especially if falling energy prices maybe sap some of the inflationary pressures currently driving prices higher.
Many of you have asked about our team’s second-half outlook. These predictions are usually famous last words (!), but I would say we still believe in equity markets given solid fundamentals including and especially earnings growth but acknowledge that more risks are accumulating.
Concentrated earnings growth, record household equity exposure, consumer sentiment at historic lows, a tepid labor market, uncomfortably high inflation, and uncertainty around geopolitics and mid-term elections are lining up to test the market’s conviction.
While the AI investment cycle is a massive growth driver of global economic activity, current prices seem to reflect both optimism and very real anxiety over the ability to monetize, and AI’s job displacement risks. And those are the risks we know about. We didn’t have an Iran war and closing of the Strait of Hormuz on our dance card of concerns when we opened the calendar year, as one example.
Of course, I have to leave you with a good quote to give you courage for the second half and for the celebrations this weekend. Then-Senator John F. Kennedy said this on January 2, 1960, when he officially announced his candidacy for president of the United States: “The American, by nature, is optimistic. He is experimental, an inventor and a builder who builds best when called upon to build greatly.” I would add investor to that list, and say the American, by nature, is an investor in the possibilities of tomorrow. She who believes in the power of progress can commit to invest in that future even with clouds on the horizon by using disciplined judgment and by securing good advice.
We are honored to offer our support in crafting your investment plan and wish you all a happy July 4th! God Bless America!
Written by a human.