by Nathan White, CIO
As we close the first quarter of 2025, the investment landscape has been shaped by evolving economic policies, market volatility, and the enduring importance of disciplined portfolio management. While long-term investing remains the foundation of financial success, it is crucial to actively monitor and adjust strategies to align with shifting conditions.
Tariffs and Inflation: A New Market Reality
One of the most significant developments in Q1 2025 has been the increasing role of tariffs in shaping market sentiment. The latest round of trade barriers, including additional tariffs on automobile imports, has fueled market volatility. Equity markets saw periods of recovery followed by sharp sell-offs as investors responded to policy shifts. The Trump administration’s announcement of new tariffs on automobile imports and other goods has unsettled markets. If fully implemented, these tariffs could raise U.S. average tariff rates to levels not seen since the late 19th century, potentially reducing GDP growth by up to 4% over the next two years while pushing inflation higher.
While central banks, particularly the Federal Reserve, have the tools to manage long-term inflation trends, the immediate impact of tariffs remains a concern.
Monetary Policy and Market Outlook
The Federal Reserve remains at the center of economic discussions, balancing inflation control with economic growth. The market currently anticipates two rate cuts by year-end, though this projection could shift depending on inflation data and overall economic performance.
The PCE inflation numbers released in Q1 met expectations but showed a modest increase in the core rate. Investors are closely watching how inflation trends evolve in response to ongoing policy shifts. Additionally, the Fed’s decision to slow the pace of balance sheet runoff signals a cautious approach to liquidity management, stopping short of full quantitative easing (QE).
The Investment Climate Moving Forward
Investors are starting to agree with my earlier thoughts about ‘sticky inflation,’ where prices stay high for longer, and the ‘kitchen sinking’ strategy, which involves using economic weakness to re-focus the economy. Similarly, growth, inflation and earnings forecasts might not yet reflect the impact of policy uncertainty, tariffs, immigration limits, and budget cuts. The current market situation seems similar to late 2018 or summer 1998—marked by a downturn followed by a quick recovery once the Federal Reserve steps in with strong measures. This could happen within the next 6-9 months. The lack of sustained follow-through on recent rallies suggests investor hesitation. High-yield spreads are widening, and demand for traditionally defensive assets such as gold and long-term Treasuries has increased.
The upcoming months will be pivotal. The economic impact of tariffs, potential fiscal policy changes, and global liquidity dynamics will shape market movements. Investors should remain disciplined, focusing on fundamental principles rather than short-term market swings. Despite recent sell-offs in equities, sharp intraday reversals suggest that markets may be finding a temporary floor. However, caution is warranted and investors should avoid deploying capital prematurely into perceived bargains without clear signs of stabilization. While there may be tradeable lows, long-term investors should prioritize patience and strategic asset allocation.
Final Thoughts: Staying the Course
The first quarter of 2025 has reminded us that uncertainty is an inherent part of investing. While headlines about tariffs, inflation, and market corrections can be unsettling, they also underscore the value of a disciplined approach guided by sound advice. As your advisor, we are here to help you navigate these challenges and stay focused on achieving your financial goals over the long term. The combination of economic policy shifts, global trade uncertainties, and market volatility underscores the need for active portfolio management.
A well-structured investment plan, periodic portfolio reviews, and a disciplined approach will help navigate these complexities. Whether through rebalancing, adapting to new economic realities, or maintaining focus on long-term goals, staying proactive is key to financial success.
If you have any questions about how these developments may impact your financial plan, feel free to reach out. We remain committed to guiding you through these dynamic times with clarity and confidence. Let’s continue building toward your future with confidence and clarity as we move into Q2 2025.
Model Portfolio Performance and Positioning
The Managed Income model was up about 1.9% for the quarter to start the year. The allocation remains balanced to capture income, minimize volatility and reduce risk. While inflation has moderated from the highs, the moderation is slowing if not reversing. Prices remain high and the bar for future rates reductions could remain high. The market is currently expecting two more rate cuts in 2025. Elsewhere in the fixed-income space, the spread between safe securities and corporate and/or high yield fixed income has finally started to widen but it still narrow by historical standards. These spreads are a primary indicator of stress in the real economy and I consider them a very important bell whether that I monitor closely. Now is not the time to increase risk. Managed Income will remain focused on protecting capital and will primarily only add risk when conditions get extreme (i.e., recessions).
All of our equity and growth strategies outperformed relevant benchmarks through the first quarter. By way of comparison, the S&P 500 was down 4.3%, the Dow Jones Industrial Average 1.3%, the NASDAQ was down 10.4% and the Russell 2000 (Small Caps) was down 9.5%. The Liquidity Factor Strategy was up 4.5% for the quarter. This was the best performing of our subset strategies. This strategy uses a proprietary method to take advantage of pricing anomalies in stocks that are less liquid and relatively ignored by the market. The strategy is comprised of ten holdings that see little turnover. There are no holding changes for the quarter. The primary exposures remain in the Consumer Discretionary and Healthcare sectors. The Relative Strength ETF component was down about 5% for the quarter. This was with some of the broader market. The strategy is now allocated to ETFs representing Small Caps and Dow Jones Industrials Index of 30 stocks.
Fundamental 20 was down 0.70% for the quarter. It has outperformed relevant benchmarks and is relatively flat for the year so far. This strategy focuses on highly profitable companies that have excellent value compared to their cash flows and/or net income. We look for companies that are using their capital efficiently to make money. During the quarter we added the following names to the strategy: Chord Energy Corp (Oil, Gas & Consumable Fuels), Crocs (Textiles, Apparel & Luxury Goods), EMCOR Group (Construction & Engineering), UberTechnologies (Ground Transportation), Universal Health Services (Health Care Providers & Services) and Vestis Corp (Commercial Services & Supplies).
The Fast Movers strategy was up 0.90% for the quarter putting in small gain while the equity markets were down. This is our most aggressive strategy that actively seeks high growth and therefore can experience regular large drawdowns. The strategy had a great January wherein it was up over 15% but was then hit by the current market turbulence and uncertainty but still managed to eke out a gain for the quarter when the NASDAQ was down over 10 percent. The strategy now holds seven technology, six consumer discretionary, four communication services, one healthcare, one industrial, and one consumer staple positions.
The Top Flight Model Portfolio was up slightly at 0.11% for the year. As mentioned previously, this compares very favorably to the broad market indices that were down 5 to 10 percent. Our equity screens are naturally seeing a lot of movement and due to the market volatility. We are not yet making any dramatic moves unless we significant more downside and/or clarity on the tariff issue. I am writing this on April 1 which is a day before the supposed announcements on the tariff decisions – we will see. Top Flight is now comprised of 25% Fast Movers, 40-50% Fundamental 20, 10-20% Liquidity Factor, and 15% ETF RS. Among our overall equity holdings, the top five performers for the first quarter were Constellation Energy (+34%), Micron Technology (+25%), Royalty Pharma PLC (+23%), Arm Holdings (+21%), and Oreilly Automotive (+21%). The worst performers were Marvell Technology (-51%), Vestis Corp (-39%), Tesla (-34%), Broadcom (-29%) and First Solar (-29%).