1st Quarter 2025 Market Commentary
Remember Robby the Robot from Lost in Space? This shows how old I am, but whenever he thought the teenage boy Will Robinson might be in trouble, he would extend his flexible hands out of his body and flail them around while yelling: DANGER, DANGER WILL ROBINSON. He wouldn’t do anything useful, just run around moving his arms. That’s a great analogy of the stock market right now. The market thinks there is danger, but can’t quantify it, so it’s flailing its arms making noise.
Since this is a review of the quarter ending on March 31st, I must point out that the stock market went down prior to when the tariffs were fully announced. The S&P 500 index dropped 4.27% during the quarter and 8.29% from its high on February 19th. It’s my opinion that the market, after rising 25% last year, was simply overextended. Much of last year’s rise was due to the Magnificent 7 stocks and they simply couldn’t keep up the pace. There is a Magnificent 7 Exchange Traded Fund (ticker MAGS) and it dropped 15.73% in the first quarter. I also must point out that the Schwab US Large-Cap Value ETF (ticker SCHV) rose 2.5% in the first quarter.
This quarter proves that diversification can work. International markets did even better with the MSCI EAFE index of developed markets stocks rising 7.64%. I have had to talk some of my clients into international exposure over the past few years, but this quarter proves that it’s necessary.
Bonds did their job of mitigating losses in the first quarter. The Bloomberg US Aggregate Bond index rose 2.78%
Yes, your portfolio might have lost value in the first quarter, but the second quarter has been far worse so far. We are only 15 days into the quarter, but we have people talking about a bear market. The turmoil has been driven by the tariffs, but even though it’s not clear what the final tariff picture will look like, the turmoil is doing real short-term damage to the economy and the markets are reacting to that. President Trump’s math on setting the tariff levels are based on incorrect assumptions. He will be unable to reach his goals of eliminating the trade deficit with every other country and if he insists on setting immediate tariffs at such high levels, the effects will be more than just high prices. We will have shortages of basic goods that might include drugs, infant car seats, building materials, and car parts. This will be untenable which probably means it can’t happen. President Trump is a populist, and he needs his policies to be popular. He will lose control of his party if they aren’t, so I expect the tariff rate by mid-summer to be at a lower level. Trump will declare victory and the markets will recover. But it might be a rocky road before then.
Other aspects of the economy are actually doing quite well. We have a robust job market and the last pre-tariff readings on inflation were going in the right direction. If the tariff situation resolves itself, it is quite possible for the stock market to do better, but it still won’t be last year’s market. It’s hard to justify the outsize valuations for the magnificent 7 stocks and the value stocks that did well in the first quarter might continue to outperform. The dollar is likely to drop. It might have dropped anyway, since it had gone up so much, but the tariffs have caused turmoil in the bond market and with the administration doing very little to improve the deficit (tax cuts do not lower the deficit), it’s likely the dollar will drop further. This will improve the dollar-denominated results for international investing. Not to mention that international markets are much cheaper than US markets. Unlike the past 10 years, I would expect a diversified portfolio to outperform this year. But we shall see.
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