John Gorlow
| Jul 17, 2025
Are you puzzled by how the markets appear to shrug off the erratic economic decisions coming out of Washington? The only thing that seems to rattle the markets these days is when Trump threatens to fire Jay Powell—then the reaction is immediate and negative. But what about the rest of it? The tariffs are on, off, on again, delayed (but maybe not). Major U.S. trading partners are wary and confused, and U.S. businesses are feeling the heat. Headline CPI rose in May. Analysts attribute this bump to rising tariff-driven costs. The Federal Reserve, once leaning toward rate cuts, is now weighing the inflation implications of trade tensions.
And yet markets certainly aren’t reacting to these trends. Nor are they reacting to the average Joe, who may be worrying about health care, rising food prices, inflation, or the loss of a white collar or government job. Rather, investors appear be adapting to a seismic shift in geopolitical thinking. And that’s worth exploring. But first a look at the numbers.
Second Quarter Market Review: Strong Returns, Wild Ride
The second quarter delivered a mix of volatility, reversals, and resilience. The S&P 500 returned 10.94%, climbing to fresh highs by June’s end. International developed markets (MSCI Word-Ex U.S. Index) returned 12.05%, and emerging markets (MSCI Emerging Markets Index) gained 11.99%, with much of that return coming in a few dramatic weeks. The journey wasn’t smooth. On April 4, the S&P fell 6% following new U.S. tariffs—its 19th largest one-day drop ever. Just five days later, it surged 9.5% after a 90-day pause, the third-largest single-day gain in history. From mid-February to early April, the index lost nearly 19%, then bounced back almost 25% to finish at a new peak. Volatility didn’t derail markets, but investor sentiment remained unsettled, amid rising inflation, shifting fiscal priorities, and renewed geopolitical strain.
Fixed Income and Real Assets: Stabilizing Forces
In the second quarter fixed income markets delivered mixed results as expectations around inflation and central bank policy remained unsettled. Against this backdrop, real assets offered some ballast but with wide variation beneath the surface.
The Bloomberg U.S. Aggregate Bond Index rose 1.15% as yields retreated from Q1 highs. Treasuries rallied modestly, especially at the short end. Credit markets held firm. Investment-grade corporates returned 1.44%, and high-yield bonds added 1.84%, buoyed by stable spreads and steady demand. Munis clawed back 0.89%. Globally, bonds followed suit. Emerging market debt benefited from a softer dollar and stronger risk appetite.
Real Estate
The Dow Jones U.S. Select REIT Index returned –1.71%, while the S&P Global ex-U.S. REIT Index returned +14.21% for the quarter. From a market cap-weighted standpoint of 68% and 32% respectively, the weighted average return for the globally diversified REIT investor was +3.38%.
Commodities
Commodities delivered mixed results in Q2, with performance diverging sharply across sectors. The Bloomberg Commodity Total Return Index fell –3.08%, pulled down by steep losses in energy and softs, while select agricultural markets posted gains.
Energy prices dropped significantly, led by a –23.06% decline in natural gas due to mild weather and high inventory levels.
Soft commodities were also under pressure. Coffee plunged –19.97%, reflecting shifting harvest expectations and currency weakness in key producing countries.
In contrast, some agricultural commodities rallied. Soybean oil gained +15.00% on strong biofuel demand, while lean hogs rose +7.41% amid tightening supply.
Gold
Gold remained relatively resilient amid ongoing macro uncertainty. For the second quarter, the LBMA Gold Price Index delivered a return of +5.53%, supported by a weaker dollar and rising concerns over fiscal stability in the U.S. and abroad.
Currency
The U.S. dollar posted a sharp decline in the second quarter of 2025. The DXY Dollar Index (symbol: DXY), widely used as a benchmark for dollar strength, began the quarter at approximately 104.40 on March 31 and ended at 96.81 on June 30. That’s a drop of roughly 7.3%, one of the steepest quarterly losses in recent history. This pullback reflects growing concerns about U.S. fiscal and monetary policy, as well as increasing investor demand for non-dollar-denominated assets. The dollar’s weakness contributed to stronger returns for international equities when measured in U.S. dollar terms, providing a meaningful boost to globally diversified portfolios.
Bitcoin
Bitcoin, meanwhile, surged past $120,000 in June, driven by growing institutional interest and a more constructive regulatory outlook. U.S. policymakers are exploring ways to let banks support crypto payments, opening the door to new fee-based services around custody and settlement. This legitimization is fueling momentum. Still, Bitcoin remains a lightning rod—dismissed by some as speculative folly, embraced by others as the future of digital infrastructure.
A Geoeconomic Shift Unfolds
In “The New Age of Geoeconomics (11-July),” Financial Times Editorial Board member Gillian Tet offers a broad overview of global shifts in economic policy going back to World War I. The current debt burden overhanging the United States is part of a shifting economic story that has unspooled over a century. There was the pre-1914 era of globalization followed by post-war protectionism, populist politics and nationalism. Then there was a great expansionist period of government spending after World War II, followed by the free-market era of Margaret Thatcher and Ronald Reagan.
Today we’re witnessing a rejection of neoliberal ideals—shorthand for decades of pro-market, pro-globalization policy—in favor of what Gillian Tett calls “power politics.” The geopolitical pendulum has swung from global integration and market liberalization toward nationalism, isolation, and a new brand of retaliatory economics. Many observers see troubling echoes of the 1930s in this shift.
The broader narrative here is about geoeconomics, Tet says. We are witnessing the displacement of the old orthodoxy of free markets and capital flows. This is evident in how the U.S. is aggressively using industrial policy to reshore supply chains, restrict exports, and weaponize finance. Other nations are following suit.
Debt, Power, and the and the Illusion of Control
All of this might be less worrisome if it weren’t accompanied by skyrocketing debt, which Tett argues is driven largely by national security anxiety—primarily the perceived threat from China. This siege mentality justifies endless spending; if everyone’s out to eat your lunch, you better defend yourself.
Ray Dalio, founder of Bridgewater, echoes this view. In his latest book, he argues that the U.S., along with most G7 countries and China, is in the late stages of a massive debt cycle. “If not controlled in some way,” he warns, this will lead to a “major restructuring or monetization of debt assets,” not just in the U.S., but globally. He puts the probability of such an event at “something like 65 percent over the next five years.”
Entrenched polarization has made any serious debt-reduction strategy politically impossible. The administration’s domestic agenda—especially in the wake of past tax cuts—has widened the fiscal gap under the banner of growth incentives and deregulation. Meanwhile, the Congressional Budget Office (CBO) projects the federal debt held by the public will rise from 99% of GDP today to 122% by 2034, an all-time high. From a fiscal perspective, the math doesn’t work. This is no longer a cyclical issue—it’s structural.
Markets Look Past the Mess
Despite the noise, markets have remained oddly calm. The Atlanta Fed’s GDP tracker still hovers around 2.6%, and stocks sit at all-time highs. But the budget math doesn’t compute. No one seriously believes a $7 trillion federal budget can be balanced with tariff revenues. Even the most optimistic Wall Street Journal estimates top out at $300 billion. Meanwhile, inflation pressures are building. The New York times just reported a 2.7% uptick as tariffs take hold, while the Wall Street Journal flagged rising prices as a clear cost to American consumers. The World Bank has lowered its global growth forecast, citing growing protectionism. And the Dallas Fed now estimates that immigration restrictions alone could shave a full percentage point off U.S. growth this year.
Some believe markets aren’t ignoring risk—they’re expressing confidence in the resilience of the U.S. economy. It’s a cautious optimism, grounded in strong earnings and enduring demand. Still, that confidence may be brittle. Underneath the surface, inflation, debt, and political dysfunction continue to mount. The more optimistic prognosticators believe that markets aren’t ignoring risk, they’re simply pricing in confidence in the resilience of the U.S. economy. It’s an uneasy optimism. And it may be exactly where we are; pricing in today’s strength while bracing for tomorrow’s cracks.
Strategy in Uncertain Times
What might that future look like? We are not in the guessing-game business. But it’s possible to see two sides of a coin. Maybe earnings will continue to rise while deficits deepen. Investment will bloom in some sectors while other industries—alternative energy and solar power, for example—stagnate. Inflation cools but fiscal imbalances fester. Labor markets stay tight while ICE raids fray the workforce in agriculture, hospitality and other service sectors. Global demand holds, but trade systems fragment, driving up costs. The markets march on, making money, while conditions deteriorate beneath the surface.
Trying to get a handle on what’s to come is not a strategy. Real strategy leads back to a time-proven, empirically-verified investment formula based on long-term thinking, global diversification, and disciplined planning. Investors have reaped the rewards of that strategy through every economic cycle since World War I. It’s the same framework we use to make investment recommendations at Cardiff Park today. Our portfolios lean into global diversification, rebalancing, and calibrated risk-taking.
Hedging: What It Costs and What It Gets You
When markets climb higher and valuations feel stretched, it’s natural for investors to seek safety—somewhere, anywhere. Headlines spike, sentiment sours, and the instinct is to hedge. But how?
Some turn to gold, often called a “safe haven.” It’s a seductive story—gold as a stabilizer during market stress. But history tells a more nuanced tale. Since 1970, gold has posted positive returns in only about 60% of calendar years. By comparison, the S&P 500 has been positive 80% of the time. Gold can rally when fear is rampant, but it doesn’t reliably protect against equity drawdowns. Nor does it generate income or compound over time. It’s a trade—not a plan.
Others reach for derivatives: puts, collars, and structured notes. These strategies may offer downside protection, but the costs are often buried in reduced upside or steep fees. Structured products, in particular, can appeal to investors looking for certainty, but that certainty is priced in. As with any form of insurance, you’re paying someone else—often much more than you realize—to absorb the risk. And they’re not doing it for free.
Bitcoin has emerged as a hedge in some circles, typically framed as “digital gold.” It’s true that blockchain technologies may have enormous implications for global finance, payments, and transparency. Investors do gain exposure to these innovations through existing holdings in broad equity indexes, which include companies building infrastructure around blockchain and, in some cases, holding crypto assets on their balance sheets. But Bitcoin itself is not yet a reliable hedge. It is highly volatile, unregulated in key markets, and deeply speculative. For those still curious, access is now available through listed ETFs like IBIT. But proceed with caution. This is not portfolio ballast—it’s a speculative satellite.
Hedging in an Uncertain Environment
In Q2, the U.S. dollar dropped more than 5%—a meaningful move that caught many off guard. But for investors holding unhedged international equities, this decline amplified foreign stock returns. This is not about predicting currency moves. It’s a clear example of how global diversification—done thoughtfully—acts as a built-in hedge. It doesn’t require a market call. It just requires discipline.
Inflation-protected securities (TIPS) offer another smart layer of defense. They may not be flashy, but they do what few assets can; compensate directly when inflation rises. That makes them one of the most transparent and reliable tools for preserving purchasing power over time.
Other hedging tactics—from buying gold to layering on structured products or dabbling in crypto—can seem appealing, especially when fear spikes. But each comes with baggage: complexity, cost, volatility, or all three. Bitcoin, in particular, isn’t the hedge many imagine. It’s not a stabilizer—it’s a speculation on disruption. And structured contracts, for all their engineered elegance, tend to benefit the seller more than the buyer.
We lean into diversification. A globally balanced portfolio, built on high-quality bonds, equities across geographies, and real assets that respond differently to shifting conditions, may not promise a perfect hedge. But it offers something better—resilience. It’s not a low-cost yield play. It’s a smart, possibly the savviest, shield against uncertainty. One that doesn’t sacrifice long-term growth in the name of short-term comfort. That’s the Cardiff Park approach. No gimmicks, no panic. Just a steady hand in a noisy world.
If you’d like to review your portfolio or revisit any part of your financial plan, please contact us. We’re here to help.
Regards,
John Gorlow
President
Cardiff Park Advisors
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