Q1 2025 Market Perspective

At risk of stating the obvious, volatility has re-entered the financial markets at a feverous pace due to uncertainty around tariff and trade policy. We do not know how evolving policy will play out, however, it’s debatable that the uncertainty may currently be a bigger risk to the markets than the tariffs themselves. We also acknowledge that we are in an extremely polarized political environment which can have a profound impact on emotions. In trying to determine the path forward through an uncertain near-term, it’s useful to keep in mind a fundamental principle of our investment approach. We work with you to establish an investment mandate for your long-term plan that ultimately removes the need to make impulsive moves that may be driven by frustration or euphoria over emotional events. As your adviser, one of the most important responsibilities we have is to help you remain confident in the design and execution of your plan, relieving some of the stress and worry you may have.

While we plan for the long-term, what happens in the near-term is certainly part of the journey, and therefore we are keeping a close eye on current conditions. Specifically, we are monitoring the convergence of deteriorating soft data, such as business and consumer sentiment, with hard economic data, such as GDP and unemployment rates that have up to now remained resilient. Entering the year, we talked about the difficult undertaking facing the Federal Reserve (Fed) of trying to successfully execute a soft economic landing while maintaining a balance between employment and inflation (in other words, avoid a recession). Navigating towards that goal has become more challenging, with current sentiment expressing increased near-term risks to growth and upside risks to inflation. Yet, a few economic tailwinds have also materialized over the past several weeks including declining energy prices, lower interest rates, and a weaker U.S. dollar.

It is important to point out, that prior to the large stock market declines experienced after the additional tariff announcements on April 2, the correction of the S&P 500 index from its February peak has been orderly. Meaning, we did not see investor activity that would normally be associated with panic or more systemic issues. Instead, the stock market leadership transitioned from high growth companies that had appreciated significantly over the past two years, to more value and defensive oriented companies and international markets. Furthermore, despite ongoing volatility fixed income assets have performed relatively well this year, playing an important role for investors in balanced portfolios mitigating equity market risk.

As we navigate the next several weeks and months, we emphasize the importance of staying committed to your plan and leaning on your advisory team to talk through any questions or concerns that you may have. 

Source: Q1 2025 Total Return and Last Twelve Month returns as of 03/31/2025, Bloomberg

• U.S. equity market declines accelerated in the days following the announcement of additional tariffs, with the S&P 500 index now down roughly 15.3% for the year (as of 4/8). The index is off roughly 18.7% from its peak value in mid-February.[1]
• Leading the declines in U.S. markets have been stocks in the technology sector. The NASDAQ Composite is now in bear market territory, haven fallen roughly 23% from its peak in mid-February. International markets have significantly outperformed U.S. markets, although, the MSCI EAFE index turned negative as of 4/8.[1] 
• In lockstep with the selloff in stocks, bond yields have fallen dramatically, giving way to appreciating bond prices that has brought some stability to balanced portfolios. The 10-year U.S. Treasury dipped below 4% briefly, closing at 4.3% as of 4/8. This is an important rate, as it is closely tied to the cost of borrowing for corporations, and individuals as it impacts loans and mortgage rates.[1]

SOFT VS HARD DATA – WILL SENTIMENT BECOME REALITY?

Soft Data:

President Trump’s use of tariffs has sent a shock wave through the financial markets, and the uncertainty of how this plays out has caused a deterioration of sentiment amongst consumers and corporations. When consumers are worried about their jobs, income, and inflation, they are likely to cut back on spending. When businesses perceive conditions to be worsening, they will also cut back on capital investments, hiring, issuing debt and pursuing acquisitions. Economic policy uncertainty, which has also been viewed as an indicator of contracting economic conditions, has now spiked to levels last witnessed in 2022 (over recession concerns) and 2020 (during the COVID pandemic).[2]

More directly, sentiment has swung from euphoria to a state of uncertainty in a matter of months. Temporary shocks to sentiment would have a more modest impact to economic activity, however, the longer sentiment stays weak, and uncertainty remains elevated, the greater the risk of hard economic data catching up.

Hard Data:

Today’s hard data supports our opinion that the economy continues to display characteristics of late cycle conditions, which can be quantified as having decelerating growth, moderating inflation and an otherwise strong labor market. As we stated in our previous commentary, late cycle conditions are certainly a precursor to a recession (which would be the next stage within the economic cycle), but current conditions do not indicate that a recession is imminent nor that when it happens it will be a deep contraction.

In March, the U.S. added 228k jobs, beating expectations of 135k, while unemployment rose to 4.2%, signaling a stable labor market. Meanwhile, consumer spending remains reasonably strong, such as retail sales, and consumer debt levels and credit card data remain stable. According to the Bureau of Economic Analysis, U.S. GDP growth is expected to be around 1% for the first quarter, down from 2.4% in Q4. However, GDP Now’s alternative model forecast, which is an unofficial economic model that provides a running estimate of real GDP growth based on available data, now indicates a contraction of -0.8% for the quarter (which together signals a mixed picture overall for Q1). Looking at inflation, the Core PCE Price index increased to 2.8% in February, up from 2.7% in January of 2025. It is expected to be 2.5% by the end of Q1, signaling that inflation has slowed from its highs, but remains elevated and reinforces the Fed’s cautious stance on monetary policy.[3]

Converging Data:

Uncertainty has caused a deterioration in sentiment and a substantial increase in market volatility, which in turn may lead to a deceleration of economic activity that would likely increase the odds of an economic recession. However, current hard economic data lends support to the argument that the U.S. economy remains resilient, and should an economic contraction occur, we would not anticipate a severe downturn relative to historical norms.

The Fed is also closely monitoring this convergence of data as it plots the course for interest rate policy. While the Fed is maintaining a wait and see stance, market expectations for rate cuts this year have increased to 4 reductions of 0.25%, versus the 2 cuts that were expected at the start of the year. The Fed does not currently see risks that warrant an immediate rate cut and maintains that the economy is in a good place, buying time to seek greater clarity before adjusting policy.[4]

PERSPECTIVE ON MARKET VOLATILITY

Every few years we end up recycling commentary on historical stock market volatility. The reality is that volatility is a normal risk associated with investing, though it can often feel unsettling when it reappears after a period of being dormant. It is prudent to stay ahead of market volatility by establishing an investment policy statement that sets the rules and customizations that are appropriate for your unique set of circumstances. It is also important, to stay committed to the plan, rebalance the portfolio as it deviates from target, review your financial condition regularly with your advisor, and maintain a long-term view.

Over the past 25 years, on average, the S&P 500 Index has experienced a drawdown of roughly 15% each year. This drawdown represents the largest peak to trough drop that occurs each year. The S&P 500 index has currently fallen about 18.7% from its peak, as of 4/8. When looking at recessionary periods only (14 occurrences since the Great Depression), volatility is enhanced, and the average decline increased to 30% (ranging from 7% in 1945 to 57% in 2009). As a point of reference, in 2022, the index fell 24.5% on concerns over a recession that never materialized.[5]

Daily market volatility may also be unsettling for investors. We looked at the daily movements of the S&P 500 index over the past 25 years, specifically the number of days when the index dropped more than 2% and more than 4%. In the table below we highlight some of the data in the study, and in 2022, as a recent example, the index experienced 23 days of greater than 2% declines and 2 of those days were greater than 4%. Thus far, as of 4/8, we have experienced 3 days of 2% losses and 2 of those days were greater than 4%.[5]

Source: Bloomberg. S&P 500 Index daily close price declines as of 4/4/2025

We expect market volatility to persist as investors digest data impacting overall growth, inflation and employment, looking for signs of deteriorating economic conditions. The longer that policy and economic uncertainty persists, the greater the probability that hard data catches up to the negative soft data found in current sentiment. Volatility can be expected to wane with any clarity on the direction of tariff policy, and/or the hard economic data released over the next few weeks. First quarter corporate earnings are also on deck, which will also play a role in near-term market volatility.

SUMMARY

Managing through risk and uncertainty will undoubtedly be talked about in the days and weeks ahead, and without question, things will have changed during the time it takes to have this note published. Yet, our message is clear, and we remain diligent in our efforts to help you navigate through this period of volatility. We encourage you to reach out to your advisory team to discuss any questions or concerns that you may have around your plan.

In the meantime, we remain proactive during this fast-changing period. Active in the conversations that we are having with all of you, including, reviewing your target allocations, distribution strategies and risk/return objectives. Active in our portfolio oversight, taking advantage of market volatility in terms of tax loss harvesting, where applicable, and portfolio rebalancing as asset classes and individual position weightings have shifted. And active with our investment committee’s review of information that may impact our economic thesis and strategic allocation targets.

Most importantly, your portfolios are carefully designed with your specific circumstances in mind and its imperative we maintain a long-term perspective when navigating through periods of heightened volatility.

We look forward to hearing from you soon and we offer well wishes to you and your family.

APPENDIX

Chart A: 2025 Total Return of Major Asset Class Indexes

Source: Bloomberg; 2025 Total Return, MSCI EAFE, MSCI Emerging market, S&P 500, Barclays Agg & Barclays Muni index; 03/31/2025

1 – Source: Bloomberg: S&P 500 Total Return Index; Emerging Markets Stock Index = MSCI Emerging Markets Net Total Return Index; International Markets Stock Index = MSCI EAFE Total Return Index. Bloomberg Barclays Aggregate Bond Index
2 – Source: https://www.policyuncertainty.com

3 – Source:https://tradingeconomics.com/united-states/unemployment-rate; https://tradingeconomics.com/united-states/core-pce-price-index-annual-change;https://www.atlantafed.org/cqer/research/gdpnow.

4 – Source: Bloomberg; Rate cut expectations

5 – Source: Bloomberg: Historical S&P 500 Total Return Index

IMPORTANT DISCLOSURE

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