Quarterly Market Outlook 2025 - Q1
April 1st, 2025
2025 has gotten off to a busy start. With so much changing in the first few months of the year, it is worth recapping what has happened, and how the investment markets have reacted. Next, we will discuss a little more detail on generally where the economy and markets sit today. Lastly, it will be prudent to discuss expectations for the rest of the year. We understand that there are many different topics out there that people would like to discuss. However, in order to keep this letter to a manageable length, we have tried to restrict our topics to just those that most impact the current investment markets.
It is prudent to begin with a theme that has been problematic for multiple years now, inflation. Inflation continues to be sticky with the last three reports showing monthly increases of 0.4% for December, 0.5% for January, and 0.2% for February.[i] This leaves the annual rate of inflation as of the February numbers at 2.8%. While a 2.8% rate of inflation is much better than what was experienced in the later part of 2022 and most of 2023, it is still significantly above the Federal Reserve’s 2.0% policy target. Complicating the matter is that GDP growth rates have been slowing. While the end of 2023 was still showing GDP growth rates north of 3.0%, 2024 has shown a slowing of GDP growth rates to an annualized rate of 2.4%.[ii] If GDP growth rates stay above the rate of inflation, it does not necessarily hurt the economy. However, when annualized inflation rates (2.8%) exceed GDP growth rates (2.4%) that means that Americans are losing the purchasing power of their dollar through inflation faster than the growth of the economy can increase the value of the dollar. This puts the Federal Reserve into a difficult spot. Their primary mandate is to maintain stable prices. Inflation rates do not appear to be dropping to the 2.0% target rate in the near term. This has caused the Fed to pause any interest rate cuts to the Federal Funds rate this year, after beginning with some rate cuts towards the end of 2024. As inflation has come down from its initial surge in 2022 and 2023, which was likely caused by the excessive deficit spending of COVID, it appears that the deficit may not have been cut by enough to get the inflation number all the way back to where the target rate says it should be.[iii] This begins the tip into how the federal government may be impacting the economy and investment markets.
Coming into the inauguration, President Trump and many republicans in Congress extolled the tax cutting and elimination of waste they were going to do once they arrived in Congress. In fact, President Trump even created the Department of Government Efficiency (DOGE) to begin work immediately on cost cutting. It is unlikely that anyone is in favor of unnecessary spending or excessive government waste, so this newly created office was welcomed by the markets which surged from the time of the election until February 19th, 2025. Since February 19th, the riskier investment markets like the stock market have been negative.[iv] In fact, the S&P 500 stock index is negative for the year. The S&P 500, which is often used as a proxy for the stock market as a whole, has dropped 4.59% for the first quarter of 2025. The real question is why the sudden change in direction from the stock market. Part of the issue may be some concerns about cutting the deficit that did not exist earlier. DOGE is having a tougher time finding the levels of spending cuts it was promising early on. Instead of trillions of dollars in savings, DOGE has struggled to cut even $100 billion. Even that number is in question as some of DOGE’s accountings have not been completely accurate.[v] The fiscal year for the Federal Government started on October 1, 2024. Through the first four months of the fiscal year the government has racked up a deficit of $840 billion. If we annualized that number, it would be $2.52 trillion. This may be the concern that is sending the stock markets lower and encouraging money towards safe assets like gold and treasury bonds. However, the deficit is not just about spending cuts. The revenue side of the equation is equally important. Congress has passed a framework of a new tax bill would significantly reduce the revenue being collected by the federal government. In fact, it is estimated that the tax cuts would balloon the deficit by more than double the newly allowed $2.8 trillion created in the budget reconciliation bill.[vi] The combination of finding fewer places to cut spending with a high level of revenue cuts may be having an impact on the riskier assets of the investment markets like stocks. However, there is more than one way to raise revenue for the federal government. There is also the potential to fill some of the revenue cuts through the use of tariffs.
Tariffs are policy tool used by governments to regulate the trade between countries. In essence it is a tax that gets added to the price of a good, just like a sales tax, gas tax, or any other Value Added Tax (VAT Tax). One of the main differences between tariffs and other VAT taxes is that the tariff is not separated out on the purchase like other taxes. It has already been included into the price of the good, so the end consumer does not see it. The goal of tariffs is to increase the cost of foreign made goods to help domestic companies. This type of tax can create some additional revenue for the federal government. However, the specific way it is used is important. If creating or increasing a tariff just leads to the increase of the price of the end-product to the consumer, the government would have created inflation in the price of that specific good or product. If tariffs are applied too broadly and raise the price of all goods, that is a level of inflation that would reduce the individual people’s standard of living. Therefore, while tariffs can be used to help domestic producers, it is important to keep an eye on inflation and standard of living while doing so. President Trump has long touted tariffs and used them in his first administration without spurring inflation. Recently, President Trump’s aid Peter Navarro has claimed that Trump plans to raise $6 trillion dollars of revenue over the next ten years through tariffs.[vii] However, it is important to remember that the goal of a tariff is to change consumer behavior to utilize domestic products. If individual Americans are forced to pay the tariffs (through lack of alternatives or otherwise), it is in essence a tax increase on Americans. The fact that the administration is planning to collect $6 trillion in taxes through tariffs seems to imply that they are using tariffs as a different form of tax rather than as a tool to encourage domestic production. If a government were to utilize tariffs in this manner, it would likely lead to inflation and a reduction in standard of living. However, we do not know if that is what the Trump administration is planning to do. Trump has announced and started many tariffs in his first few months and has almost equally postponed or cancelled them.[viii] All the talk of tariffs could still just be negotiation posturing. Only time will tell how this administration truly intends to use tariffs, however, the comments by Mr. Navarro, if true, would be concerning from an inflation and standard of living point of view. If there continues to be a large degree of uncertainty surrounding the tariffs in the United States. Investment markets, and especially the riskier markets like the stock market, do not like uncertainty. The longer uncertainty persists, the more volatility we will likely see in the investment markets.
This is a good place to focus on where we sit at the end of the first quarter of 2025. As we mentioned above, the S&P 500 is down 4.59% for 2025. Meanwhile, some of the investments people utilize as safe havens are up substantially for the year. Gold is up 21.12% so far in 2025 and Treasury Bonds are up 2.24% for 2025.[ix] This seems to send the message that investors are concerned about the short-term direction of US stocks. What makes this picture a bit more puzzling is that other stock markets seem to be doing fine so far in 2025. In Europe the FTSE 100 is up 5.01% for the year, the DAX P is up 11.32% for the year and the Euronext 100 is up 6.78% for the year.[x] Even the Hong Kong based Hang Seng Index is up 15.25% so far this year.[xi] It seems the only other stock market that is struggling like the U.S. is Japan. This then begs the question of whether this is a temporary drop in the U.S. stock market due to short term political pressures or if this is the start of a trend for the U.S.
Before we dive into what to expect in the future, it is important to look at where the economy sits today as well, not just the investment markets. As we mentioned above U.S. GDP growth has been slowing for the past year. It currently sits at about 2.4%. However, the predictions for GDP going forward do not present much hope for a change in direction. According to the recently published report from the Atlanta Federal Reserve, the GDP growth estimates range from about 2.5% all the way down to a negative 0.5%.[xii] This implies that there should not be any expectation for significant growth in the economy in the short term. In fact, there could even be a short-term contraction. Other areas of the economy seem to be holding up so far. Mortgage delinquencies, while they have ticked up a bit recently, are still below their pre-COVID levels. [xiii] However, some of the recent uptick can be written off to the extreme wildfires in the Los Angeles area. Also, foreclosures are starting to ease off after having risen noticeably from a year ago. Auto loan delinquencies are up about 15.8% in 2024 from 2023.[xiv] Credit card delinquency rates are also climbing. They are normal by historical standards but are higher than they have been in a decade.[xv] Lastly, unemployment has stayed in a fairly tight range between 4.0% - 4.2% since May of 2024.[xvi] There have not been any substantial moves yet. However, the government layoffs from the Trump administration have not yet been reflected in these number. In total, the economy seems to be in decent shape. The growth rate has slowed but still looks on balance to be growing. There may be some consumer debt concerns growing in the credit card and auto loan areas, but nothing that seems urgent or imminent yet. It seems like this economy has the equal potential to get better, worse, or stay the same.
Now that we have reviewed what has happened for the year so far and where the economy and investment markets sit currently, it is time to go into expectations going forward. First, we would like to reiterate our comments from our last letter. There is a high degree of uncertainty in the U.S. due to the new administration. Because of that uncertainty and the quickly changing dynamics we cannot make any written recommendations as situations may quickly arise that would change a recommendation. What we do believe, as we have been saying in our letters for a while now, is that it is important to know what you own and why. We are likely in a market where buying blind indexes may struggle against active management. With that being said, we do continue to promote our same ideas from our last letter. First, inflation remains sticky as noted above. Since it seems unlikely that noticeable reductions in deficit spending are on the horizon, it is likely that inflation will probably stick around for the near future. Therefore, having some investment that do well with persistent inflation will likely continue to be a good strategy. Also, the demand for electricity continues to grow with the population and the growth of technology. This demand is unlikely to subside and thus gaining exposure to infrastructure and other means of providing electricity could be another area of interest. As an example, despite the stock market being down, the utility sector ETF XLU is up about 4.19%.[xvii] Again, knowing what you own and why you own it are likely to make a significant difference in your investment performance this year.
We hope everyone has had a good start to 2025. It sure seems to be a year marked with change. The U.S. government has changed political hands, and the fallout from all those changes in policies and attitudes are still being felt. However, while the political environment may have significant implications for the investment markets in the short term, the changes will eventually slow and normal economic and investment market conditions and cycles will take control. Please stay safe and healthy, and we look forward to checking back in with you in the summer.
Best wishes,
Christian D. Searcy, Jr. Melanie M. McDonald Vincent F. Cuomo
CFP®, CPWA®, AIF®, MBA CFP®, CEPA® Executive Partner
President Vice President, CCO
-Current market data is as-of 03/31/2025. Source of data unless otherwise noted: Yahoo Finance. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. The opinions and predictions expressed herein are as of March 31st, 2025, and are subject to change at any time based on market and other conditions. No predictions or forecasts can be guaranteed.
This material does not constitute a recommendation to buy or sell any specific security. Past performance is not indicative of future results. Investing involves risk, including the possible loss of a principal investment.
Investment in equities involves more risk than other securities and may have the potential for higher returns and greater losses. Bonds have interest rate risk and credit risk. As interest rates rise, existing bond prices fall and can cause the value of an investment to decline. Changes in interest rates generally have a greater effect on bonds with longer maturities than on those with shorter maturities. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and/or interest payments. Index performance is presented for illustrative purposes only. Direct investment cannot be made into an index. The S&P 500 Index is an unmanaged index, which is widely regarded as the standard for measuring the U.S. stock market performance. It represents the 500 most widely held publicly traded companies.
i https://www.bls.gov/news.release/cpi.nr0.htm
ii https://www.bea.gov/data/gdp/gross-domestic-product, https://www.bea.gov/news/2025/gross-domestic-product-4th-quarter-and-year-2024-third-estimate-gdp-industry-and
iv https://finance.yahoo.com/quote/%5EGSPC/
v https://www.npr.org/2025/03/06/nx-s1-5318072/how-much-money-has-doge-saved-budget-deficit-congress
vii https://www.cnn.com/2025/03/31/economy/tariffs-largest-tax-hike/index.html
viii https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
ix https://finance.yahoo.com/quote/GC%3DF/, https://finance.yahoo.com/quote/ZN%3DF/
x https://finance.yahoo.com/quote/%5EFTSE/, https://finance.yahoo.com/quote/%5EGDAXI/, https://finance.yahoo.com/quote/%5EN100/
xi https://finance.yahoo.com/quote/%5EHSI/
xii https://www.atlantafed.org/cqer/research/gdpnow
xiv https://www.lendingtree.com/auto/debt-statistics/
xvi https://www.bls.gov/news.release/pdf/empsit.pdf
xvii https://finance.yahoo.com/quote/XLU/