Quarterly Update

The first quarter (Q1) of 2025 began well but ended in a confused slump driven primarily by political anxiety. This uncertainty fed into consumer and investor confidence that declined throughout the quarter and caused a correction in major stock market indexes like the S&P 500 and NASDAQ. Bonds perked up as investors rushed to safety which helped buoy performance for balanced portfolios. That lift was good to see after a few crushing years for bond investors, but it unfortunately took pain in the stock market to get there.

Here’s a summary of how major market indexes performed during Q1 and for the year so far:

• US Large Cap Stocks: down 4.3%
• US Small Cap Stocks: down 9.5%
• US Core Bonds: up 2.7%
• Developed Foreign Markets: up 8.1%
• Emerging Markets: up 4.5%

If there was one word to define the quarter and the day-to-day reality of the markets during Q1 it would be tariff. The Trump administration made rebalancing global trade through the use of tariffs a key part of its election pitch and kicked off 2025 with a slew of tariff announcements. There would be 25% tariffs on goods from Canada and Mexico, then Columbia, then smaller tariffs on goods from China, followed by other tariffs on goods such as steel and cars made outside of the US. Some of the tariffs went into effect during Q1 while others were paused or renegotiated. Some were set to start just after Q1 closed, while others were planned as reciprocal tariffs. Most of these announcements and related news adversely impacted investor confidence and market prices almost in real time. And when this news was added to additional policy announcements not directly related to the markets but that were still unsettling for many, these changes quickly destabilized what had been a positive market outlook as the year began.

Investor optimism surged to a record spread over pessimism immediately following the November election. Unfortunately this began to fall into year-end. Each subsequent month showed declines, ultimately by March hitting the Conference Board’s lowest level for its survey of investors since late 2022. This tracked with declining consumer and business confidence, although when parsed for political affiliation it was clear that republicans were more optimistic than democrats and independents. Still, the rapidly changing outlook spurred market analysts to further adjust their economic forecasts as Q1 progressed and recession/stagflation fears were discussed. This kicked into high gear during February, sending major indexes into a correction. There were brief rallies along the way and the final day of the quarter saw stocks climb out of a whole to finish strongly, but the overall tone was still negative.

Most domestic stock sectors ended the quarter in oversold territory except for Energy, which was a standout performer, rising nearly 8% over Q1. Consumer Staples ended the quarter up about 2%. Healthcare and Utilities stocks also fared decently, but the Tech and Communication Services sectors make up about 39% of the S&P 500 and fell by about 11% and 1% for the quarter, respectively. Negatives easily weighed down the positives.

It was a different story overseas, however. As political anxiety stretched beyond borders, a global defense reshuffling spurred markets in Europe. Germany proposed spending over one trillion euros on infrastructure and defense, reportedly related to concerns about its alliance with the US. Germany doesn’t like to borrow but has been in a recession so perhaps the German government needed a good excuse to juice up its economy. Whatever the reason, news of dramatic spending plans helped the typical European index rise during Q1 from around 7-13%, depending on its composition. Since these are only proposals, time will tell the lasting impact on markets. Emerging markets were generally higher as well with the typical index up nearly 5% for the quarter.

Q1 saw some signs of life in the US bond market. Longer-term bonds did better than shorter-term and inflation-protected bonds performed best, but most parts of the bond market rose about 2% or more over the quarter. Many investors had been looking elsewhere for safety and income since 2022 but finally felt safe piling into bonds as inflation showed signs of stabilizing and the Federal Reserve offered a reasonable outlook for rate changes this year. This more positive view toward bonds helped push the yield on the 10yr Treasury note, a key market and economic benchmark, to about 4.25% as Q1 ended after peaking at around 4.8% in January. Cash equivalents like money market mutual funds still offered around a 4% annualized return throughout the quarter and, while they technically underperformed bonds, are still a good place to store short-term reserves for the time being.

There’s no way to sugarcoat that this is a concerning time for a lot of people. While it’s far beyond the scope of this note to offer much about the broader societal themes being discussed so much lately, I can offer a reminder about the counter-intuitive nature of long-term investing. According to my research partners at Bespoke Investment Group, the S&P 500 has been higher six and twelve months later seven out of eight times that investor confidence has reached such a low point. While there’s no guarantee that will happen this time, investor anxiety and fear is usually a contrarian indicator. It’s uncomfortable to go against the grain but it is absolutely something we have to deal with periodically as long-term investors. As always, please don’t hesitate to ask questions.

Have questions? Ask us. We can help.