It’s an anxious time for pretty much everyone. No one likes to see their wealth slashed quickly. The Trump Administration has said we may need to take upon some short-term pain for long-term gain, but who likes any pain?
We’ll start this commentary by spending a little time reflecting upon the first quarter results, then more time addressing the stock market carnage that has developed since the second quarter began just last week.
Let’s take a look first at how the major asset classes have fared in 1Q25 and then talk about what’s next.
Equities: The year started strong for equities but the mood changed as the tariff threats became reality. As of the end of the quarter, it really wasn’t that bad. The S&P500 had registered a 4.3% loss. But it was really the big winners of the last couple years that took the hit. In fact, if you remove the Mag 7 from the results, the bottom 493 stocks were basically flat for the quarter. More diversified benchmarks like the MSCI AC World Index fared better, only down 1.3%, as international stocks showed their best outperformance over domestic in years. The Goldman Sachs Strategic International Fund, one of our favorite international holdings, was up 10.0% for the quarter!!!
Fixed Income: Unlike equities, fixed income had a good first quarter with the Barclays Aggregate Bond Index posting a 2.6% return. Yields dropped on growth-slowing fears and when yields drop, bond prices rise. Further, a lot of the proceeds from recent equity sales are finding their way into the bond market. As we have mentioned in our past few market commentaries, the math on bonds continue to look pretty good.
Alternatives: It was a solid showing for the group of liquid alternatives products we follow. The standout was gold*, up 19.1%! Gold has been seen as a flight to safety during this uncertain environment. Market neutral strategies also can take advantage in this environment where valuation seems to matter again. One of our favorite market neutral funds, Victory Market Neutral, rose 3.50% for the quarter. Real Estate had a nice positive showing, up 2.1% as represented by the Easterly Global Real Estate Fund. That said, not every alternative did well – managed futures and other strategies with heavier beta to equities struggled in this whipsaw environment. But in general, alternatives did their job of behaving differently from equities – this can minimize the volatility of your overall portfolio returns.
Putting it all together, two out of the major three assets classes did decently in 1Q25, going to show that diversification can really help! A diversified portfolio with all of the three asset classes above was close to flat or down just a little, depending upon the mix of your allocation to each asset class.
Enough about 1Q25. It was only a week ago when it ended, but it feels like an eternity since then as the equity market selling accelerated as Wall Street digested the aggressiveness of the Trump tariffs. The S&P 500 fell another 9.5% in just four trading sessions, putting it close to bear market territory! The risk of recession has jumped in a week’s time from about 30% to some calls for 60%! If the tariffs stick around, its just not good for the economy as they both raise prices and slow growth…basically, the definition of stagflation. Hard for the Fed to help out as their dual mandate is to fight higher prices and keep unemployment in check. Lowering rates does not help in the fight against inflation. The market is pricing in a few cuts in 2025, but Fed Head Powell seems content to sit in “wait and see” mode. And frankly, until there is some clarity on tariffs, that is how CEOs of big companies, leaders of small companies, investors, and pretty much most of us will likely play it, i.e. wait and see. Which again leads to slowing growth.
It will be interesting to see the first 1Q25 GDP reading which comes out at the end of this month. It should show a reading close to flat or it could be negative. And at this point, a negative reading in 2Q25 would not be a surprise. Which means we could be in a recession soon. It’s not a done deal of course. As we saw in trading action today, the stock market reversed about 8% (a huge upward move) because of a rumor that tariffs might be halted for 90 days. It turned out to be just a rumor and markets came back down some, but it goes to show you that you cannot try to time this market. As we said before and how this chart shows below, usually the best stock market days come right after the worst!
To sum it up, this is a wild time. For some, it may be nerve-racking and scary. That’s understandable. There’s always a reason to sell, but remember that the market has always recovered from every past bear market to achieve new heights!
In closing, don’t let emotion dictate your investment decisions. It’s only natural to feel anxious, but staying the course has always worked. Sometimes the best course of action is NO action. One can see from the looking at the top 15 worst market days since 1950, returns a year later were positive in all but one period with an average forward year return of 30.9%! Again, it’s never about timing the market, but time in the market.
There’s a saying that the stock market is the only place you find people running away from sale prices! Utilizing a trusted wealth manager like DWM can keep you grounded and help you stay on course. Don’t hesitate to contact us for a consultation on your portfolio if you’d like assistance.
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT