Economic Commentary

After a summer characterized by mixed economic signals, investors and policymakers now look ahead to autumn for clarity on the path of inflation, growth, and interest rates. Policy changes enacted earlier in the year are beginning to filter through and could become more visible in the data ahead.

Market Performance Year-to-Date

Despite volatility, year-to-date market performance shows investors are cautiously optimistic. After a solid first half, markets continued higher throughout the summer months. Domestic large-cap equities are now up approximately 10% for the year, showing resilience despite the uncertain backdrop. International markets have seen some modest profit-taking but remain a bright spot, with developed and emerging market stocks accumulating gains of 23% and 19%, respectively. The bond market has also performed well, delivering roughly 5% returns year-to-date as investors discount slowing economic data and expectations for the Federal Reserve’s next policy moves. The positive results of diversified portfolios prove the old adage that, even in dynamic times, patience pays when investing.

Fiscal Policy Update

Since the One Big Beautiful Bill Act (OBBBA) was signed into law over a month ago, the market has been digesting its long-term implications. The key takeaway remains the bill’s delayed stimulative effect. The structure of front-loading tax cuts while pushing spending reductions to later years is projected to be mildly expansionary, particularly between 2026 and 2028. This dynamic could potentially work against the Federal Reserve’s efforts to contain inflation, complicating the path for monetary policy in the years ahead.

Tariff Update

The September 2nd deadline for secondary tariffs looms, and uncertainty continues to weigh on sentiment. While negotiations with key trading partners are ongoing, progress has been slow, and many businesses are bracing for impact by activating contingency plans. The fiscal impact remains a critical variable. While the OBBBA is set to widen the deficit, tariff revenues provide a partial offset. Market participants appear to be pricing in the possibility for further delays in implementation, lessening the immediate impact of the tariff policy.

Mixed Economic Signals

After July’s surprisingly soft jobs report and corresponding downward revisions to the prior months’ reports, all eyes are on the August jobs data for confirmation of a cooling trend. Despite job additions slowing to a 3-month average of just 35K per month, the unemployment rate has remained steady at a healthy 4.2%. U.S. retail sales, for their part, advanced 3.9% year-over-year and 0.5% month-over-month. Adjusting for inflation, spending advanced 1.2% year-over-year and 0.3% month-over-month. The broad advance implies a healthy start to consumer spending in the second half of the year after uncertainty around trade policy dampened sentiment in the first half. While the labor market appears to be shifting into a lower gear, additional clarity on trade policy and a rebound in the stock market support greater confidence in consumers’ spending power.

Inflation: The Last Mile

The “last mile” in the fight against inflation continues to be a challenging trek. The latest Consumer Price Index (CPI) report for July showed a slight moderation in the headline number, which remained steady at 2.7% year-over-year, beating analyst expectations by 0.1%. However, the data revealed that vehicles (+4.8%), shelter (+3.7%) and food (+2.9%) inflation remains sticky, preventing a more decisive move toward the Fed’s 2% target. The looming tariffs represent the most significant wild card, with the potential to create a new wave of cost-push inflation this fall, just as the labor market’s cooling effect begins to take hold.

Fed Update

The combination of two consecutive soft employment reports and stubbornly high, albeit moderating, inflation has significantly shifted expectations for the Federal Reserve. Officials will have the benefit of an additional inflation report and another jobs report before meeting in September. Following the August jobs report, however, investor conviction has solidified and market consensus is now fully pricing in a quarter-point interest rate cut at the upcoming September FOMC meeting. This marks a notable change from the Fed’s divided stance in July and reflects a clear pivot toward supporting a moderating economy, even as the final battle against inflation continues. Investors now anticipate between two and three 25bps cuts by the end of 2025.

Staying Disciplined

The economic crosscurrents we felt in the summer are persisting into the fall and the outlook is clouded by slowing labor growth, looming tariffs, and the complex interplay between fiscal stimulus and monetary policy. In this environment, it’s more important than ever to remain anchored to a sound, long-term strategy. While headlines may cause volatility, our core investment philosophy is unwavering and we continue to believe that a disciplined, diversified approach is the surest way to navigate uncertainty and achieve your financial goals. On behalf of our entire team, thank you for your continued trust.