Quarterly Market Commentary – Mosaic Model Portfolios
In their quarterly update, the Multi-Asset portfolio team at Madison Investments discusses the events of the quarter, and provides an outlook for the markets moving forward.
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Market Recap – Second Quarter 2025
There are years where nothing happens and then there are quarters where years happen. This past quarter was most certainly one of those quarters where years, if not decades, seemed to have occurred. We began the quarter with a trade war and closed with a hot war in the Middle East with U.S. engagement, tossed in a debate over “One Big Beautiful Bill” (OBBB), as well as a direct challenge to the independence of the Federal Reserve by the executive branch. Through it all, although volatile, markets charged higher. So high, in fact, that the S&P 500 Index closed the quarter at an all-time high after gaining +10.9% since March 31st. The index now stands at +6.2% year-to-date and a far cry from the April 8th low of -15%. It turns out a 90-day tariff ceasefire is worth a 25% rally! After a brief three-month hiatus, the Magnificent 7 (Mag-7) returned to the spotlight, where those seven stocks averaged over +20% in 2Q (despite Apple’s -7.5% showing), and growth stocks once again trounced value names (Russell 1000 Growth Index +17.8% vs. Russell 1000 Value Index +3.8%).
International equities outpaced the U.S. market for the second quarter in a row with the MSCI ACWI ex-US Index gaining +12.0% (+17.9% YTD). However, the US dollar nosedive (-7% in 2Q alone) drove the bulk of the return for US based international investors. Interest rates experienced dramatic swings, but the benchmark 10-year US Treasury rate ended the quarter roughly where it began at 4.2%, and the Bloomberg US Aggregate Bond Index returned a stable 1.2% for the quarter, putting it at a solid 4.0% year-to-date. So, after a disastrous start to the year for the markets, the second quarter provided a textbook example of the value in tuning out the noise and staying the course.
Performance
Our Multi-Asset portfolios provided solid absolute returns for the quarter but fell short of blended benchmarks on a relative basis largely due to the constitution of our U.S. equity allocations. Our portfolios are notably underweight the Mag-7 stocks that, as mentioned above, dominated the U.S. equity market in the second quarter. Portfolios were also held back by a relative underweight to outperforming international equities and overweight to underperforming U.S. small and mid cap stocks versus neutral benchmarks. We continue to see better valuations and opportunities in the U.S. small/mid cap space than their pricier large cap counterparts.
Fixed income performance was favorable and provided outperformance relative to the Bloomberg US Aggregate Index benchmark across most portfolios. Holdings in intermediate term US Treasuries and corporate bonds provided the greatest benefit to performance while our overweight to mortgage-backed securities and long-term US Treasury positions were the biggest detractors.
Outlook & Positioning
As the early April market action can attest, markets abhor uncertainty. The good news is that we likely hit peak uncertainty when the CBOE Volatility Index (VIX) eclipsed 60 on April 7th, two days before the 90-day tariff pause announcement. Unfortunately, investors have bid up markets to levels that convey the eradication of uncertainty. To us, much remains in question, especially as we approach the 90-day deadline. While the worst-case trade scenario that was developing at the start of the quarter appears out of the question, when the dust eventually settles, tariffs will remain much higher than where we entered 2025 and will be a drag on global economic growth. Will tariffs eventually prove inflationary or end up destroying demand? Is the secular trend of American exceptionalism and preference for U.S. assets finally coming to an end? The dramatic fall of the US dollar and continued strength of gold are cautionary indicators of growing investor discomfort with U.S. policy making.
Years of elevated prices are wearing on U.S. consumers, but as long as the labor market holds and asset prices stay high, consumers are likely to keep spending and keep the economy chugging along. The benefits of deregulation and probusiness incentives of the OBBB stand to boost market sentiment over the second half of the year. We remain cautiously optimistic but are concerned that markets have become overextended in the near term. So, while we’re very thankful for the rapid market recovery, we’re not sleeping on uncertainty and will continue to employ calculated risk-taking in our active asset allocation decisions as stewards of your hard-earned capital.
We truly appreciate your confidence and partnership.