The Quarter in Review | 1Q 2025
US MARKETS FALTER WHILE INTERNATIONAL STOCKS END Q1 UP
Equities were off to a challenging start in the first quarter of 2025 as the global equity market declined -1.6% as measured by the MSCI All Country World IMI Index. Global markets were dragged down by the U.S. as the Russell 3000 Index returned -4.7% and the so-called Magnificent 7 trailed the market. Weaker U.S. returns contrasted with the country’s recent stock market dominance and the positive performance of non-U.S. markets during the first quarter. Developed and emerging markets were both up as the MSCI World ex USA IMI Index returned +5.8%, and the MSCI Emerging Markets IMI Index returned +1.7%, highlighting the benefits of global diversification.
A new administration in Washington commanded global investors’ attention, and markets quickly reacted to ongoing threats of tariffs and retaliation. Energy stocks led in the U.S. while tech stocks like Nvidia and Tesla saw declines. While global markets reacted to news from Washington, some countries like China and Mexico led U.S. returns by double digits notwithstanding threats of tariffs. Global inflation remained stubborn in January and February, leaving upcoming central bank rate cuts in question. FOMC participants revised their 2025 target rate expectations higher. Globally, value stocks outperformed growth stocks, while both the small cap and profitability premiums were negative.
FIXED INCOME
Concerns about trade policy and its impact on growth weighed on yields for the quarter. The Federal Reserve (Fed) has held rates steady through the first three meetings of the year. There is still the expectation of rate cuts at some point later this year. The Fed is in a little bit of a pickle policy wise. Tariffs are propping up inflation via flow through price increases. At the same time, tariffs are creating uncertainty resulting in slowing economic growth, creating a short-term policy conundrum.
In terms of total returns, the U.S. Aggregate Bond index returned +2.78% for the quarter and is up +4.88% over the last year.
ALTERNATIVES
Commodity markets diverged during the quarter due to policy uncertainties and, combined with a weakening dollar, helped propel Gold to record prices. Natural Gas and Copper were the best performers for the quarter though, up +30% and +23.8%. Overall, the Bloomberg Commodity Total Return Index was strongly up +8.88% for the quarter. The relative flat bond market for the quarter carried through to commercial real estate. U.S. Real Estate Investment Trusts (REITs) were fairly flat, up +1.17% for the quarter and +9.79% over the last 12 months.
RECESSION AND MARKETS
Against the backdrop of heightened political uncertainty, potential trade wars, and lower consumer confidence, investors may have concerns about whether the U.S. could tip into a recession. The National Bureau of Economic Research identifies recessions using backward-looking data, so we won’t officially know if we are in a recession until after it has begun.
Real (inflation adjusted) GDP fell -0.3% in the first quarter. Expectations for the second quarter remain uncertain, mostly due to the unknowns surrounding the current global tariff policy in several areas:
Service and retail business who rely on Chinese imports
Federal government spending is expected to decline (this is both good and bad)
Drag on U.S. exports reflecting retaliatory tariffs levied by other countries
Potential increase in unemployment which tends to lag economic declines
There have only been two U.S. recessions since 2001, the Great Financial Crisis (2007 – 2009) and The Pandemic Recession – and both were marked by considerable economic declines where unemployment reached double digits. The Pandemic Recession lasted for only a short period of time. It has been well over 15 years since a multi-year recession occurred; for those in their mid-30s and younger, they have never experienced a significant prolonged economic downturn.
Fortunately for investors, markets are forward-looking and generally react before we see slower economic growth show up in the macroeconomic data. This also means that expected stock returns can be positive, even when the economic outlook is weak. This is borne out in the historical data. As noted on the chart below, returns of the S&P500 1, 3 and 5 years after a recession’s start, averaged positive returns of +6.4%, +43.5% and +70.5% respectively over the almost 80-year period from 1947 to 2024.
LOOKING FORWARD
Market volatility coincided with the implementation and expansion of new tariff policies by the Trump administration. This has created uncertainty about what the impact will be on the global economy and then in turn, corporate earnings. Policy changes can happen at a moment’s notice and can be materially impactful.
After a 20% decline off the February 19 peak, a 90-day pause in tariffs was announced on April 9. As a reaction to this policy change, the S&P500 surged +9.5% and the NASDAQ almost +12%, the largest one-day market increase in almost 20 years. As of this writing, the U.S. market continues to recover from earlier declines, now only down less than 4% year to date.
Investors who panicked in the days leading up to the April 9 surge likely paid a hefty price by responding out of emotion instead of adhering to a well-conceived and disciplined investment plan. Conversely, investors who remained calm during this turbulent moment avoided losses that could’ve been catastrophic.
While short-term market movements remain unpredictable, especially during periods of policy transition and uncertainty, maintaining discipline and focus on long-term objectives continues to be a reliable approach to investment success. During these times, commitment to disciplined investment management becomes even more important.
Maintaining discipline – adhering to long-term investment strategies rather than emotionally reacting to short term volatility.
Systematic rebalancing – methodically buying into market declines and trimming positions that may have run up.
Tax-loss harvesting – identifying opportunities to realize losses in taxable accounts that may offset gains and potentially reduce tax liabilities.
SUMMARY
Perhaps more so than in recent memory, the road ahead appears more ambiguous and tumultuous than ever. Thankfully, none of us are traveling this road alone. Uncertainty, tumult, rebounds, gains – they are all part of the investor’s journey. And, like every quarter, we’ll say it again because it bears repeating – this is where time we spend with you up front in developing your investment plan pays dividends in the long run.
We appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss with you.
Please follow this link to read the complete Quarterly Market Review (QMR) - 1Q 2025.