Spring 2025 Quarterly Commentary

April 15, 2025
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Economic Perspective

With tariffs and stock market volatility dominating the news headlines, we thought it would be useful to share how investor psychology has impacted economic forecasting. Economic forecasting is not generally considered an “easy” job. It requires strong analytical skills, critical thinking and a solid understanding of economic theories, mathematics and statistics. Reported economic data, while useful, lacks certainty. It is often subjected to numerous revisions.  We recently encountered a puzzling example of differing interpretations of data from two Federal Reserve member banks – the Atlanta Fed and the New York Fed. The Atlanta Fed’s GDPNow model recently forecasted negative economic growth (-0.3%) for first quarter of 2025 whereas the NY Fed’s Nowcast forecasted strong economic growth (+2.6%)! How can one group of ‘experts’ signal contraction and the other forecast growth? We believe much of the difference can be explained by the current unprecedented uncertainty around trade policy. Will tariffs be universal or reciprocal? Will they be short-term in nature with hopes of negotiating a trade deal? Or should we begin to factor in long-term price increases and possible stagflation? It seems to change on a daily basis! Is it any wonder economic heads are spinning and the stock market is experiencing well above-average turbulence?! To be brutally honest, our heads have been spinning some, too. However, there have been a few positive developments in recent days that we would like to share.  First, the Trump administration announced a 90-day pause on reciprocal tariffs – replacing them with a temporary 10% universal rate for all countries except China (raised dramatically due to their retaliatory tariffs). This buys the administration some time to negotiate a compromise rate on a per country basis and also incentivizes foreign direct investment into the United States. It seems to be working. Treasury Secretary Scott Bessent announced the administration has successfully negotiated significant investment pledges (over $3 trillion) from the likes of the United Arab Emirates ($1.4T), Saudi Arabia ($600B), Hyundai ($20B), Apple ($500B), and Taiwan Semiconductor ($100B). Secondly, the all-important electronics supply chain (semiconductors, computers, smartphones, etc.) got a reprieve with a reclassification to a new 20% tariff bucket – much less than Wall Street analysts had feared. This has been well received. Finally, the domestic automotive manufacturers are beginning to play offense. Both Ford Motor Company and Stellantis are offering employee pricing (on most models) for a limited time to take market share from foreign car producers that are currently subject to a 25% tariff rate. Smart move, indeed! They may also benefit from recent chatter that their supply chains may soon be exempt from tariffs while they move production back to the United States. The above-mentioned initiatives are likely to offset some of the economic impact of the new administration’s trade policies. The jury is still out as to how much. We will be intently monitoring new developments and proactively communicating with clients as this story unfolds.

Market Perspective

The swift late-quarter stock market decline more than reversed all the early-2025 gains. The Standard & Poor’s 500 Index corrected greater than 17% led by many of the Magnificent 7 technology names - with the tech-heavy Nasdaq index declining 27% from its prior peak on 2/19. The drawdown was the first significant stock market correction since October 2023 – and erased greater than $6 trillion of stock market value! Importantly, the rotation away from the previous leaders led to corresponding relative strength into several out-of-favor areas of the market – including value-style stocks and dividend payers. As a result, our equity portfolios remained well positioned during the storm. As expected, the equal-weighted S&P 500 Index outperformed the top-heavy, market capitalization-weighted S&P 500 Index on a relative basis during the quarter. The last time this occurred was in 2022. We have seen this movie before – especially during periods of market volatility, especially downward volatility!

In our opinion, the market’s fundamental backdrop remains on solid footing. Although its current 2025 earnings growth estimates have declined from low double digits, we believe mid to high single digit earnings growth is still attainable. Importantly, post-correction valuations have also moved from ‘stretched’ to ‘reasonable’. Therefore, with earnings estimates having been reset & valuation multiples having experienced contraction, we are beginning to see increasingly more investment opportunities. With our ‘margin of safety’ now much more favorable, you could see equity portfolio activity pick up (if appropriate) over the near term.

Looking Ahead

We look at the investment landscape through both a top-down (macroeconomic) and bottom-up (fundamental) lens – but also with a keen eye on changes to fiscal, monetary and trade policy. We believe our approach enables us to ‘see the forest for the trees’ during times of market stress. This discipline oftentimes keeps us in the market when others are selling – and was especially lucrative recently when the S&P 500 and Nasdaq Indices jumped 9.5% and 12%, respectively, in one day! As we often remind ourselves, time in the market is much more important than trying to time the market. This perspective gives us the best chance to outperform the market in the long run. Importantly, we are cautiously optimistic that recent volatility will pass sooner than later. Please keep in mind that history has shown time and time again that stocks over the long run are mainly driven by strong company fundamentals. This gives us confidence our clients are well positioned. Hang in there, time is on our side.

This document contains general market commentary and information that should not be construed as advice to make any specific investment. For investment advice, please consult with your portfolio manager. Our quarterly market commentary often contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Investing involves the risk of loss, including risk of loss of principal invested, that clients should be prepared to bear.