After some brief market anxiety caused by the April 2nd tariff announcements, equity markets have rallied to near all-time highs. This rally has continued in the face of the Israel/Iran war and the threat it poses to global oil prices. While the final economic outcomes of the war and U.S. tariff policy are still unknown, markets have shifted their focus to what has remained a strong U.S. economy, rising corporate profits, and interest rates.
Pressure is building on the Federal Reserve to lower interest rates as inflation has remained below expectations. The Fed has kept rates high in anticipation of tariff related inflation in the second half of the year. Should that inflation not materialize, bond market forecasters expect the Fed Funds rate to end the year about half a percent lower than current rates.
The expectation of lower rates and the uncertainty of U.S. tariff policy has also caused the U.S. Dollar to fall to three-year lows. A weaker U.S. Dollar, while negative for anyone traveling overseas this summer, is a positive for the U.S. trade deficit and for non-U.S. investments. The declining Dollar tailwind has helped non-U.S. equities outperform U.S. equities so far this year. Investors with a more “global” portfolio allocation are finally seeing some benefits after years of U.S. market exceptionalism.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm.