April 2025 Newsletter

Welcome Spring! 

The change of seasons brings with it the promise of longer days, new beginnings and growth. However, transitions are often accompanied by challenges. Like the shift from winter to spring, economic growth and higher returns endure setbacks. That was certainly the case during the first quarter of the year with policy changes, DeepSeek’s threat to artificial intelligence, erratic tariff implementations, and continued uncertainty regarding the future of the markets. Despite this backdrop, the economy remains on level footing and unemployment low. Challenges and/or setbacks are inevitable. We have purposefully constructed our client portfolios to minimize downside risk through proper diversification and believe there are appropriate protection measures in place to withstand the unpredictable.

 

U.S. Economy

Whereas tariffs were front and center during the first quarter, there had been a growing belief that the administration would not follow through fully on many of the tariff threats, as we saw announcements followed quickly by delays and exclusions. That all changed at the writing of this newsletter when President Trump announced a suite of tariff hikes on major trading partners effective April 9^th, including 34% on China, 20% on European goods and 24% on Japanese imports. The 34% on China will come on top of the 20% tariffs imposed in February and March, meaning the base tariff rate on Chinese imports will now be 54% (and this does not include levies from previous administrations). Additionally, beginning April 5^th, a 10% across-the-board tariff will be levied on all imported goods, meaning American importers will have to pay a surcharge to the U.S. government for goods produced overseas. The administration contends that tariffs are necessary to counter trade barriers that other countries have placed on America, as well as help slash the trade deficit and revive U.S. manufacturing. However, some experts say the levies will result in higher prices and lower economic growth, possibly teetering into a recession. This is a fluid situation, and we saw retractions and modifications to tariffs in the first quarter. Moreover, it is not clear how trading partners will respond, meaning uncertainty could remain elevated for some time. For now, tariffs have surpassed inflation and employment as the biggest factor impacting the economy.

Households and businesses alike are anxious that tariffs, federal layoffs and a gradual weakening in the labor market could hurt the economy. Despite this, there has not been definitive evidence that the economy is headed for a recession. Consumer spending fell (-0.2%) in January for the first time since March 2023, but the decline came after several strong months of above-trend spending to end 2024. Separately, retail sales slumped in January but rebounded in February, offering reassurances that while consumer spending has slowed this year, it has not halted. Low unemployment and solid labor market conditions have kept household income elevated. Total nonfarm payroll employment rose by 151,000 in February, and the unemployment rate changed little at 4.1%, maintaining its narrow range of 4-4.2% since May 2024. Notably, the decline in Federal government employment was offset by upswings in areas like health care, financial activities, transportation and warehousing, and social assistance. Wages rose 0.4% and personal income shot up 0.9%, also boosted by cost of living adjustments for social security recipients.

The consumer price index (CPI), which measures costs of goods and services across the economy, rose 2.8% in February from a year earlier, down from 3% in January. Meanwhile, core inflation, which excludes more volatile food and energy, increased 3.1% annually, down from 3.3% in January and the smallest 12 month advance since April 2021. The index for shelter rose 0.3% in February, accounting for nearly half of the monthly all items increase.

The personal consumption expenditures (PCE) price index, which reflects changes in the prices of goods and services purchased by consumers in the U.S. and is the Fed’s preferred indicator of inflation, increased 0.3% in February and is up 2.5% from a year ago. Excluding food and energy, the core PCE price index rose 0.4% and is up 2.8% from a year ago. Inflation remains stubborn and above the Fed’s 2% target. Alternately, the producer price index (PPI), which tracks the price changes companies see, rose 3.2% in February from the year prior, down from the 3.5% in January. Excluding food and energy, core prices rose 3.4%, below January's 3.6% gain.

After keeping interest rates unchanged at its March meeting at a range of 4.25% to 4.5%, Federal Reserve (Fed) policymakers still expect two rate cuts this year but will closely monitor inflation, employment, and growth data. For context, tariffs are never deflationary. This means higher prices at a time when inflation had been trending lower, as well as weakening economic growth. Increased duties on imported goods threaten to roil interconnected global supply chains and deter new investment until businesses have more clarity on their underlying cost structure.

Trade uncertainty and market volatility have undermined consumer confidence. The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, declined for the fourth consecutive month in March, falling 7.2 points to a reading of 92.9. The expectations index, which is based on consumers’ short-term outlook for income, business, and labor market conditions, dropped 9.6 points to 65.2, the lowest level in 12 years. Likewise, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, fell to a reading of 57 in March from 64.7 in February, the lowest level since November 2022. Consumer sentiment is down 28% from a year ago.

Real gross domestic product (GDP), the broadest measure of economic output, rose at an annual rate of 2.4% in the fourth quarter of 2024, down from 3.1% in the third quarter, according to the U.S. Bureau of Economic Analysis. For the year, real GDP increased 2.8% in 2024.  Looking ahead, Fed officials believe the economy is on track to grow at an annual rate of 1.7% in 2025, down from the 2.1% pace they forecast at their December meeting. Federal Reserve Chairman Jerome Powell reiterated that the economy remains broadly healthy, despite slower growth.

 

Traditional Asset Class Returns Q1 2025

 

U.S. Stock Market

2025 is off to a rocky start as growing uncertainty around tariffs and how they may weigh on corporate profits, along with fears over the artificial intelligence boom disappointing, have spooked the market. After two back to back years of 20%+ returns, the S&P 500 declined 4.3% in the first quarter. Similarly, after soaring 29.6% in 2024, the technology-heavy Nasdaq composite fell 10.3% in the quarter. Nine out of 11 sectors posted negative returns in March, with only Utilities (+0.3%) and Energy (+3.9%) in positive territory. Notably, Communications, Technology and Consumer Discretionary were the worst performing sectors for both the month and quarter (after climbing 40.2%, 36.6% 30.1%, respectively in 2024). It follows that the Magnificent Seven (Apple, Alphabet, Meta Platforms, Microsoft, NVIDIA, Amazon and Tesla) logged the worst month and quarter on record for the group.

After two consecutive years of outperformance, growth underperformed value in the first quarter, which is not surprising given the artificial intelligence pause. The Russell 1000 Value index finished the quarter up 2.1% compared to the Russell 1000 Growth index, which was down 10%. Moreover, the breadth of the market seems to be widening given the smaller variance between the two styles over the past year. The Russell 1000 Value index is up 7.2% and the Russell 1000 Growth index up 7.8% from a year ago.

 

Fixed Income

While the first quarter of 2025 was filled with uncertainty and angst, we saw fixed income securities provide ballast within diversified portfolios by contributing positive performance and outperforming the U.S. equity market. Traditionally, bonds and stocks have a negative correlation during periods of market stress or volatility which provides downside protection across diversified portfolios.

Driven by geopolitical, government policy and trade war fears throughout the quarter, investors began a flight to quality or safety as they looked to move their assets into higher quality more stable securities (U.S. Bonds). This phenomenon caused U.S. interest rates to decline and bond prices to rise due to their inverse relationship. The 10-year U.S. Treasury bond started the year at 4.57%, ending the quarter at 4.21%, a decline of 0.36% or 36 basis points. Rates fell across the interest rate curve with only the short end holding steady as the U.S. Federal Reserve did not lower the federal fund rate at their March meeting. Fed policy makers are trying to thread the needle with rates by balancing inflation and job growth in a very ambiguous market. Indeed, to paraphrase Nick Timiraos, reporter and Federal Reserve follower for the Wall Street Journal - Fed policymakers are often referred to as “hawks” when fighting inflation and “doves” while defending the labor-market.  Jerome Powell looks to be a duck - calmly gliding along the surface while paddling profusely below in murky waters to keep the economy on track.

Looking ahead to the second quarter, we will be closely watching the Fed at their upcoming May and June meetings to see if they ultimately lower rates. The outlook for 2025 might be uncertain, however we continue to advocate the importance of a diversified portfolio knowing core fixed income assets will help provide stability to investors during volatile times, allowing them to focus on their long-term goals.

 

Diversifying Asset Classes

All diversifying equity asset classes were positive for the quarter, save for U.S. Mid Cap stocks (-3.4%). Regardless, all diversifying equity asset classes, including U.S. Mid Cap stocks, added significant relative value in the quarter, outperforming the S&P 500.

U.S. Corporate spreads, or the premium investors require for investing in additional risk, have widened, behaving more similarly to U.S. equities given their corporate relationship. For the quarter, U.S. TIPS (+4.17%), Mortgage Backed (+3.06%), and U.S. Government bonds (+2.48%) were the top performing fixed income sectors, with international bonds close behind. High yield or below investment grade was the lowest performing sector albeit mostly positive.

 

 

Conclusion

With change comes challenges, and we anticipate continued volatility in the market as tariff implementation plays out and works its way through the economy. Whereas emotion often fuels market direction in the short run, earnings power drives market direction in the long term. Temporary setbacks also create opportunities. Our dynamic investment process uses a proprietary screening process to identify quality companies with competitive advantage(s) and solid earnings growth. We will continue to review our investments to ensure that we are implementing our best ideas from a quality and valuation standpoint. We construct portfolios to meet your long term financial goals in all environments and encourage you to stay the course. As always, should you find yourself questioning your current situation, our team is always here to help you navigate through these challenging times.