The first quarter of 2025 left investors’ heads spinning from the Trump administration’s rapid-fire executive orders, on-again-off-again tariff announcements, and DOGE’s (Department of Government Efficiency) efforts to reduce waste, fraud, and abuse. These initiatives increased uncertainty about the evolving health of the economy and by extension corporate profits. The Federal Reserve, with a dual mandate to create maximum employment and price stability, is caught between a rock and a hard place in the context of its monetary policies. Investors, who’ve been buying on the dips, also found themselves between a rock and a hard place as markets whipsawed, testing their resolve.

 
Equity indexes hit record highs in mid-February when premium valuations left little margin for error. Then came a rapid selloff culminating with the implosion in those over-hyped companies known as the Magnificent Seven. Markets played a game of Whack-A-Mole during 1Q-25, up one day, down the next, with most of the momentum on the downside. Broad-based U.S. equities posted losses during the quarter, with small (S&P 600), medium (S&P 400), and large (S&P 500) companies falling -8.93%, -6.10%, -4.27%, respectively. For the first time in a blue moon, international markets outperformed domestic indexes. Developed international equities (MSCI EAFE) gained 6.86% and emerging markets (MSCI EM) gained 2.93% for the quarter.
 
Fixed-income investors fared well during the quarter, primarily because interest rates declined in a flight-to-safety reaction. As interest rates fall, bond prices rise. This is an example of how bonds can temper the volatility of equities, helping investors stay the course. The rate on the 10-Year U.S. Treasury Note fell from a high of 4.89% in mid-January to 4.21% by 03/31/25. Shorter rates, as measured by the 2-Year U.S. Treasury Note, fell from 4.39% in January to end the quarter at 3.90%. Our short-term fixed-income benchmark (Bloomberg 1-5 Year Govt/Credit) index had a total return of 2.02% (income and change in price).

The FOMC (Federal Open Market Committee) held interest rates steady at its March meeting while it monitors what Fed Chairman Powell called hard and soft data. Hard data is objectively quantifiable information like jobs, inflation, and housing. Soft data, such as sentiment indicators, is more subjective and measures what consumers and businesses are thinking. It can change rapidly depending on current events and is more difficult to interpret, thus, the Fed’s rock and hard place dilemma. Some hard data has been holding up as evidenced by 4Q-GDP (Gross Domestic Product) which was revised up slightly to 2.4%. Core retail sales rebounded, gas prices fell, and capital goods shipments gained recently.
 
The latest reading on core inflation (excluding volatile food and energy), released March 28^th showed an increase of 0.4% during February and 2.8% year-over-year in the PCE (Personal Consumption Expenditures), the Fed’s preferred inflation gauge. While slightly above consensus estimates, it moved in the wrong direction. Consumer spending grew less than expected and existing home sales are at their lowest level since 1995, casting doubt on the strength of the economy. Soft data, including the March Conference Board consumer sentiment index and the University of Michigan’s index of consumer sentiment, both fell during March while inflation expectations increased in both surveys.
 
Markets and investors don’t like uncertainty, and the current climate is above average on the uncertainty meter. Current estimates for first-quarter economic growth as measured by GDP are far-ranging. The volatile “real-time” Atlanta FedNOW model is predicting 1Q-25 GDP at -2.0%, while many Wall Street economists see 1Q-25 GDP coming in at +2% real growth (annualized, net of inflation). We get the first of three GDP readings on April 30. As for tariffs, those in support argue that any short-term pain will be worth it to create a more even playing field between the U.S. and its trading partners and restore manufacturing jobs. Others believe these actions are unnecessary disruptions that could cause a reversal of an otherwise robust economy and possibly result in a recession.
 

The Federal Reserve is in a better position this time to stimulate the economy if needed. Because it raised the fed funds rate from a zero-bound range to a recent high of 5.50%, before cutting it to 4.50%, there is room to cut rates further. This is often referred to as the Fed put. In securities markets, a put is an option for an investor to profit if a security falls in price. In this context it means the Fed’s intervention could act like a “put option” and is a type of recession insurance. The market consensus just increased the expected number of cuts this year from one to three, with short-term rates falling to 3.00% over the next two years.
 
Equity prices are directly correlated with expected earnings growth or lack thereof. Equity bulls believe the long-term bull market remains intact, primarily due to the current administration’s pro-growth agenda, what some are calling the Trump call. Every bull market endures a correction or two along the way, and bulls argue the current correction will prove to be just another blip in the long-term upward growth of the economy and equity markets. Bears, on the other hand, see darker clouds ahead and argue that the complex interconnectivity of global trading cannot be easily flipped on and off with ever-changing trade policies. Could both camps be right?
 

As the 1^st quarter gave way to the second, President Trump unveiled his “Liberation Day” tariff plan unsettling markets further. Since no one knows the eventual impact and duration of these actions, investors need planning now more than ever. Long-term, goal-focused investors who possess an intelligent financial plan should tune out the noise and rest, knowing their portfolios are structured to ride out each crisis du jour.
 
Stay the course.

Sam Taylor, CIMA^®, AIF^®, CRPC^®