Q1 2025 Review | Market Update

Q1 2025 - A Volatile Start to the Year

The first quarter of 2025 began with optimism surrounding AI advancements, pro-business policies, and strong economic momentum. However, reality unfolded differently as concerns over trade policies, inflation, and economic slowdown took center stage, driving markets into a turbulent period.

Key Market Drivers:

- Trade Uncertainty Dominated: Constant shifting of U.S. tariff policies led to high trade policy uncertainty, impacting business and consumer confidence. As the uncertainty persisted recession fears grew, investor sentiment soured.

- Interest Rates and Bond Markets: The Federal Reserve held interest rates steady, despite growing concerns over growth, inflation, and employment. Bond markets reacted by rallying, with U.S. Treasuries serving as a safe haven and the Bloomberg U.S. Aggregate Bond Index finishing up 2.8%.

- Stock Market Performance: U.S. stocks struggled amid shifting rate expectations and tariff tensions. The S&P 500 declined 4.3%, marking its weakest quarter since 2022. The "Magnificent 7" tech stocks, which have driven a lot of the gains over the past 2 years, fell by almost 15%. International markets outperformed U.S. equities by roughly 10 percentage points, driven by AI momentum and stimulus in China and broad fiscal support in Europe - especially defense spending.

- Commodities on the Rise: Copper (+24%) and gold (+19%) reached all-time highs, driven by tariff concerns and central bank purchases. Bitcoin, however, fell 12% after a strong 2024.

Looking Ahead:
The newly imposed tariffs were higher than many expected and have certainly rattled the markets to start the second quarter. The longer these high tariffs remain in place the greater the risks may be of slower economic growth and higher inflation across the globe, which in turn increase recession risks.

While certainly possible, it is not our base case scenario that the recently released tariff rates will remain at these high levels for the rest of 2025. We're of the belief that the tariff rates were intentionally set higher to create more urgency for trade negotiations. Time will tell if this strategy works and how ita ctually plays out. We're also of the belief that the quicker compromises are reached and new trade agreements are worked out, the shorter and less impactful the effects of this trade war will be.

In the meantime, we believe that continued elevated volatility in the markets is likely in the near term. While not easy, we feel that staying the course with your diversified, long-term asset allocation, and not making quick, emotion-driven changes is very important. Per a Raymond James article recently sent to us, since 1980, the S&P 500 has averaged one 10% + intra-year decline per year. Yet the S&P 500 has had an average annual gain of around 10% over this same time period. Time in the market has proven to be much more effective than trying to time the market. I've attached a page from JP Morgan illustrating how missing out on good market days has historically been much more harmful to returns than being in the markets on bad return days. Market pullbacks and volatility are a regular occurrence that are unfortunately part of investing. The bounce back from the lows are often quick and if you're out of the market you can miss these potentially important recovery days.

Another attachment from MFS Investment Management shows the recovery performance of the S&P 500 following historically bad periods. In looking at the 10 worst market years since 1972, the S&P was positive 80% of the time one year later, 89% of the time 3 years later, and 100% of the time 5 years later.

Please don't hesitate to reach out to your advisor with any questions! We'll plan to keep you updated during your scheduled meetings along with further communications as warranted as things continue to involve.