The first half of 2025 has been volatile, particularly in U.S. equity markets, but with the recent rebound, the S&P 500 is up 6.2% year to date through June 30th. By contrast, international equity markets outperformed U.S. equity markets, with the MSCI EAFE up 19.9% and MSCI Emerging Markets up 15.6% year to date:
One factor in international equity outperformance is the weakening U.S. dollar compared to other currencies, falling over 11% year to date, the worst start to a year since 1973: Dollar Extends Biggest Slump in Five Decades | Barron's
The chart shows that U.S. equities have outperformed over the trailing three, five, and 10-year periods, led by U.S. growth stocks. This could be a shift in investor sentiment where U.S. market valuations are loftier than international valuations, or it could be a blip on the continued dominance of U.S. growth stocks.
Artificial Intelligence and Productivity: Vanguard feels that there are trends all pointing to a very different decade than the one investors have experienced. Vanguard published recent white papers on their projections around artificial intelligence, the coming decade budget deficits, and what that could mean for the future economy and workers: Megatrends.
In the coming decade, Vanguard looks at the future of work, where they use the Bureau of Labor Statistics categories to classify workers’ day-to-day tasks:
- Basic (Documenting / Communicating Information)
- Repetitive (Scheduling Work / Operating Machines)
- Uniquely Human (Making Decisions / Developing Strategies)
What they find is that to date, technology has aided in sectors or jobs with repetitive tasks, but the more uniquely human a job, the less technology contributes to output.
This may be changing. We had a pediatrician appointment recently, and the doctor recorded our conversation (let’s ignore any ethical and HIPAA concerns for the moment) with an AI app to write up a summary of the appointment. By using AI technology, A doctor, a uniquely human occupation, will save time by merely reviewing the automated transcript of our visit and no longer being the one logging notes to our file, increasing their productivity. This may mean the doctor can spend more time with patients and avoid the doldrums of logging and summarizing notes (my words). The drawback may be that the doctor does not write down their notes, review them as thoroughly, and thus may lose or miss something along the way, with the doctor spending more time at the beach with all the time saved.
Consensus U.S. GDP growth projections for most economists and forecasters are for growth to be 1.5% - 2.0% between 2028 and 2040, citing low inflation and productivity growth and pressure from rising fiscal deficits. Vanguard feels this is the least likely scenario, giving it a 10-20% probability. Their most likely scenario is that AI enhances productivity (a 45%-55% probability) and U.S. GDP growth is +3.1%, with AI being as transformative to the economy as electricity. The next most likely scenario, 30%-40% probability, is that AI does not provide the productivity boost necessary, and real U.S. GDP growth is -1.0% from 2028 – 2040. Their concern is that if AI does not enhance productivity, an aging workforce and entitlement spending will reduce growth. Overall, Vanguard feels this will be a very different decade, and diversification will play a key role in investor portfolios.
Financial Planning/Investment Strategy Corner:
Passive Investing: The rise in passive investing has benefited investors, providing access to inexpensive, efficient investment products. Recent research finds that passive investing may be creating different and new risks and opportunities for investment portfolios. First, actively managed mutual funds tend to underweight large stocks, and retail “noise traders” tend to react to price action vs. fundamental analysis. With investors’ shifts from actively managed funds into passive funds, researchers found the stock prices of the largest firms disproportionately rose, and retail “noise traders” also bought based on the price action, pushing valuations beyond fundamentals. The largest companies then have lower financing costs, because of the inflow of capital. The researchers find that there is a rising size distribution of firms skewing towards larger firms, which can lead to greater market concentration and volatility. In the chart mentioned earlier, you can see that smaller companies performed below large cap stocks for the trailing 3, 5, and 10-year periods. Overall, the researchers' findings are that passive investing doesn’t mirror the market; it has shaped it: Passive Investing Is Fueling the Rise of Mega-Firms. That Could Affect Your Portfolio in Unexpected Ways | Morningstar
Quick Hits
- Fourth of July Events in Maine: Fourth of July Firework Displays | WGME
- The benefits of campfires, for any campers this year: Why Campfire Therapy Is Gaining Ground | Outdoor Magazine
- More benefits to naps: Need to Solve a Problem? Try Taking a Deep Power Nap for an 'Aha' Moment | Smithsonian
- I usually sign up for anything about Kurt Vonnegut: The Cosmic Joke of Kurt Vonnegut's ‘Cat’s Cradle’ - The Atlantic
Cartoons at the Fair: We had the pleasure of visiting the Monmouth Fair last week. It’s mostly an agricultural fair, one of the first of the year in the state, with oxen pull demonstrations and competitions for the best-tasting pickled vegetables. In the exhibition museum portion, there was a binder full of news clippings, and they were opened to cartoons about tariffs. The cartoons were written by Charles Batholomew from the Minneapolis Journal, who was active in the late 19th and early 20th century. It just showed me that no matter how times and things may change in the decades to come, we may still be dealing with the same issues as we did over a hundred years ago. There is a collection of his cartoons posted online: Charles Bartholomew Cartoon Collection
Happy Fourth of July everyone!
Quote: “Perseverance in almost any plan is better than fickleness and fluctuation.”-Alexander Hamilton
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