Second Quarter Newsletter

Responsible Guidance:  Second Quarter 2025 Newsletter, July 2025

All-Time High...

In a somewhat unusual event, the S&P 500 finished the second quarter at a new all-time high.  Not that all-time highs are unusual; they are not. It is just a little less common that one occurred at the closing price on the last day of a calendar quarter.  Given the geopolitical issues, tariff news, uncertainty (at the time) about financial legislation, and concerns about inflation and interest rates, the closing price for the S&P 500 might have come as a little bit of a surprise. 

It is a good reminder of how important it is to separate emotion from strategy. Behavioral finance research shows that investors often react to headlines and short-term performance, potentially undermining long-term outcomes. That is why your financial plan is not just about data—it is about creating a framework to operate within Your Personal Economy^SM ,  the aspects of your financial life that are unique to you.

Our goal is to help you remain focused on your personal goals, regardless of economic, market or political noise.  In the pages that follow, we will review what happened in the second quarter, as we help you plan for what comes next.  With Your Personal Economy^SM at the center of the process, we aim to help you answer the most important financial question: “Am I going to be okay?”

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification, meaning strategies can include investments based both in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index. This index represents stock investments across 23 developed and 24 emerging markets. The index rebounded in the second quarter and was up 11.64%, producing a positive 9.85% return for the first half of the year.  The performance was broadly supported across regions as many popular diversified equity benchmark indexes did well in the second quarter.  The positive performance halted the negative trend observed over the previous two quarters.

For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. The index was up 4.58% for the second quarter, improving YTD performance to 7.27%.  Though inflation concerns continue in the U.S., investors did buy government bonds as a flight-to-quality in April at the height of concerns about tariffs.  Additionally, many foreign central banks have cut interest rates this year to stimulate growth, given the global economic uncertainties.  The flight-to-quality trades and cutting interest rates are typically helpful for bond performance.

U.S. Economy

Although the U.S. economy contracted in the first quarter, data compiled by the Atlanta Federal Reserve suggests growth may return soon.  The employment situation remains a concern, as the unemployment rate is staying above 4%.  The Federal Reserve has been holding interest rates steady due to inflation concerns resurfacing. However, the most recent inflation data has been relatively tame. 

The Bureau of Economic Analysis (BEA) announced in its final estimate for the first quarter of 2025 that real Gross Domestic Product (GDP) contracted by an annual rate of 0.5%.  The first quarter was negatively impacted by imports, which decrease GDP, and a reduction in government spending (the full press release can be found at https://www.bea.gov).  This ended the previous streak of ten positive quarters of U.S economic growth. The last time the U.S. economy shrank was the first quarter of 2022.    

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the second quarter of 2025) using an approach like the BEA. On July 9, 2025, the estimate for second quarter GDP from the Federal Reserve Bank of Atlanta suggests a rebound in growth to 2.6%.  Should actual data continue at its current pace, this suggests the U.S. may avoid a recession in the short-term.  Please note that this estimate updates regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.

Job growth continues, but the unemployment rate remains above 4.0%.  According to the Bureau of Labor Statistics (BLS), the U.S. gained 147,000 jobs for the month of June, and the unemployment rate held at 4.2%.  BLS indicated job growth was notable in  state government and health care (full press release can be found at: https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, rebounded in the second quarter with the index up 10.94%, bringing year-to-date (YTD) performance into positive territory, up 6.20%.  Sector performance rotated in the second quarter as technology and consumer discretionary sectors were some of the strongest performers, after lagging in the first quarter.  Healthcare and energy were distractors in the second quarter, after leading in the first three months of the year. 

For technical analysts and trend followers, the index moved above the 50-day moving average and 200-day moving averages in early to mid-May, after starting the quarter below the popular trend lines.  Prior to the first quarter, the last time the index was below both moving averages was October 2023. 

Dividing index components into growth and value, growth-focused stocks lead in the second quarter, reversing first-quarter performance.  Growth stocks have mostly dominated over the last decade.  Value last outperformed on a calendar year basis in 2022, when most equity indexes were struggling.

International Stocks

International-developed-country stocks (such as those in the European Union and Japan), measured by the MSCI EAFE index, continued their positive momentum, up 11.78% in the second quarter, bringing YTD performance to up 19.45%.  This was the best performing index that we cover for the first half of the year.  Non-developed, or emerging-country stocks (such as those located in Brazil, India, and China), measured by the MSCI EM index, were also strong, gaining 11.99% in the second quarter and finished the first six months up 15.27%. 

After struggling in 2024, relative to U.S. stocks, international stocks continued to outperform in 2025 helped by attractive valuations, on a relative basis, and a weaker dollar during that time, along with other factors.  The last time international stocks outperformed U.S stocks on a calendar year basis was 2022, and then 2017 prior to that.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index (gauges performance of investment-grade intermediate bonds), was up 1.21% in the second quarter and up 4.02% YTD.  The Federal Reserve has paused cutting interest rates in January.  However, investors have sought safety in bonds as most government bond yields are lower than at the start of the year.  As demand for bonds increases, typically prices rise and interest rates fall, possibly resulting in gains for existing bond holders.  However, the opposite can occur when there are more bond sellers than buyers. 

The 10-year U.S. Treasury bond yield finished the second quarter at 4.24%, below the 2024 year-end rate of 4.58%. 

A yield curve plots interest rates against the time-to-maturity to earn those rates. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion, and fixed-income investors are compensated for taking longer-term risks. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty, and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

At the end of the second quarter, the 2-year rate was 3.72% (and 10-year 4.24% per above), keeping the shape of the yield curve slightly positive, at 52 basis points (a basis point represents 1/100 of 1%).  The yield curve was positive by 33 basis points to start the year.  So, though rates are lower overall, the shape of the curve remained relatively similar to the start of the year.

The yield curve was inverted (short-term rates higher than long-term rates) from the third quarter of 2022 to the third quarter of 2024.  As a reminder, the Fed started raising rates in March 2022 to fight inflation and then began cutting rates in September 2024, with inflation reducing. If the economy continues to grow and if inflation slows, the curve could be indicating continued growth opportunities for the economy with long-term rates possibly remaining higher than short-term rates.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, fell less than 1% in the second quarter.  YTD the index is still positive, up 1.80%.  

According to Freddie Mac (FM), the average 30-year residential home mortgage rate increased slightly to 6.72% (as of 7/14/2025). During the past 52 weeks, the rate has been between 6.08% and 7.22%.

Natural Resources

Of the indexes we cover, the Bloomberg Commodity Index was the weakest performing index in the second quarter, after performing the best in the first quarter.  The index was down 3.08%, but remained in positive territory for the year, up 5.53%.  Within the Natural Resources category, livestock and precious metals did well, while natural gas and oil struggled in the second quarter. 

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are Registered Investment Advisors (fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. We also believe these actions potentially strengthen clients' portfolios or financial positions. We use this same approach with our own personal money.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy. Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation, and allows us to alter the course, as necessary. If you have experienced any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economy^sm

Concluding Comments

Despite economic uncertainty and geopolitical concerns, equity market indexes covered in our newsletter all advanced in the second quarter, capped by the S&P 500 reaching an all-time high on June 30th.  Predicting what might happen next is difficult, which is why we work to implement risk-appropriate globally-diversified strategies for our clients and ourselves.  As always, we are here to help you stay aligned with your personal goals and navigate through Your Personal Economy^SM.

Baron Updates  

Please save the date for our next client appreciation event, Casino Night 2025, in New Jersey – October 9, 2025. Details will soon follow. We hope to see many of you there!

Visit our website blog to read or view our educational content on a wealth of financial topics, such as retirement and financial planning, Social Security, Market Update videos, and more. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing.

Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

This year, we are happy to mark the 15th anniversary of our Baron Financial Group Scholarship, awarded to two deserving Fair Lawn High School graduates, who are continuing their education in a business program.

We are pleased to recognize our own Lucy De Robertis, Client Relationship Specialist at Baron Financial Group.  For over twenty years, our clients have benefited  from Lucy’s knowledge and experience, and dedication to her work.  We are fortunate to have this hard-working, caring individual on our team and a member of the Baron family!  Thank you, Lucy, for all you do!

We hope to see you at our event in October! Happy Summer!

Warmest Regards,

Baron Financial Group, LLC
www.baron-financial.com

This  material is not intended to be relied upon as a forecast, research or  investment advice, and is not a recommendation, offer or solicitation to  buy or sell any securities or to adopt any investment strategy. The  opinions expressed are as of July 15, 2025, and may change as  subsequent conditions vary. The information and opinions contained in  this material are derived from proprietary and non-proprietary sources  deemed by Baron Financial Group to be reliable, are not necessarily  all-inclusive and are not guaranteed as to accuracy. Past performance is  no guarantee of future results. There is no guarantee that any  forecasts made will come to pass. Reliance upon information in this  material is at the sole discretion of the reader. Investment involves  risks. International investing involves additional risks, including  risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse  political, economic or other developments. The two main risks related to  fixed income investing are interest rate risk and credit risk.  Typically, when interest rates rise, there is a corresponding decline in  the market value of bonds. Credit risk refers to the possibility that  the issuer of the bond will not be able to make principal and interest  payments. Index performance is shown for illustrative purposes only. You  cannot invest directly in an index. Different types of investments  involve varying degrees of risk, and there can be no assurance that any  specific investment will either be suitable or profitable for a client  or prospective client’s investment portfolio. Historical performance  results for investment indices and/or categories generally do not  reflect the deduction of transaction and/or custodial charges, the  deduction of an investment management fee, nor the impact of taxes, the  incurrence of which would have the effect of decreasing historical  performance results. Inclusion of index information is not intended to  suggest that its performance is equivalent or similar to that of the  historical investments whose returns are presented or that investment  with our firm is an absolute alternative to investments in the index (if  such investment were possible). Investors should be aware that the  referenced benchmark funds may have a different composition, volatility,  risk, investment philosophy, holding times, and/or other  investment-related factors that may affect the benchmark funds’ ultimate  performance results. Therefore, an investor’s individual results may  vary significantly from the benchmark’s performance.