Market Update: April 2025
What is going on?
Everyone is probably fully aware of last week’s tariff announcements and subsequent market sell-off. While the Wednesday tariff announcement was not a surprise, the size and scope of the tariffs announced were significantly greater than expected. This caught the markets off-guard. Markets anticipated reciprocal tariffs but what came out was not true “reciprocity” as the formula used to calculate said tariffs was a little wonky, in our opinion. The surprise caused the first market reassessment and downdraft on Thursday with the S&P 500 falling 4.8% and overall U.S. indices suffering their steepest declines since 2020. On Friday, retaliatory actions by other countries began to crystallize, especially China’s 34% tariff announcement on all U.S. imports, and selling pressure picked up with the S&P 500 falling an additional 6% on Friday. By week’s end, $6.6 trillion of market value was lost by U.S. companies, the S&P 500 and Dow ended in correction territory and the Nasdaq and Russell 2000 were in bear market territory.
Our thoughts
We are believers in true free trade, and there is no doubt that global imbalances have built up over the last 50 years. Objectively, we do believe the intent of the proposed tariffs was and is to right-size these imbalances to “more fair trade.” The risk and debate obviously lie in the execution. But, if we can get to “freer” trade policies, then the U.S. could come out the other side of this better off. Our hope is these negotiations happen quickly to give businesses clarity to make informed, long-term decisions for their people and their companies.
While we do not have direct insight into the current administration’s thinking, we do believe that the higher-than-expected tariffs are being used as a negotiation tool—not permanent—to bring countries to the table. The question is how long will it take to resolve the tariff disputes? The longer it goes on, the bigger the risk of doing long-term damage to the economy and increasing recession odds. We don’t like the idea of an economic war and taking on the entire world at the same time, but that is the hand we’ve been dealt.
While many businesses pulled forward their buying/inventory in anticipation of tariff negotiations, the ongoing uncertainty and lack of clarity could bring global trade to a temporary halt as businesses take a wait and see approach. What the pandemic taught us was that global supply chains are complex and difficult to rearrange overnight, and the global economy is not a light switch you can flick on and off. The longer this goes on the higher the probability of a slowing global economy and a potential recession.
In our opinion, if markets believed the current tariffs were going to be here long term, i.e., permanent, the stock market would be down a lot more, around 30-40%. If permanent, it would most likely cause a deep, global recession. We currently view this as a very low probability, less than 10%.
Our current highest probability outcome is that we will negotiate these tariffs down over the next couple of months, we will avoid a recession and markets will respond favorably. The U.S. has many favorable factors right now: historically low unemployment, a decent economy and interest rates at levels where consumers and businesses can operate efficiently but high enough where we can cut to stimulate if needed. The odds of Fed interest rate cuts in 2025 have increased dramatically in the last 48 hours.
Like everyone else, we cannot predict the future, but we are always analyzing the situation and when the markets give us new data points, we will change our probabilities and outlook.
What are we doing?
While no one likes going through corrections or bear markets, we are happy to report that clients’ portfolios are holding up very well in this environment versus major stock indices. While not immune, our defensive stock positioning has outperformed relative to U.S. indices year to date and provided relative downside protection within that asset class. In addition, clients’ alternatives, bonds and money market funds are positive on the year and providing a much-needed counterbalance to the stock side of portfolios.
Lastly, the most important action during periods of uncertainty is to go back to your specific plan and to focus on what you can control. Here we feel extremely confident and we know we have worked hard with our clients to have conversations along the way to understand their specific set of circumstances and build-out portfolios tailor-made for them. For instance, we work hard to ensure we understand your near-to-medium term liquidity needs and build large cash and cash equivalent, i.e., U.S. Treasuries, positions within client accounts for any distribution needs. Our goal is for families to have line of sight on the next two to four years of cash needs inside their portfolios. Not only is this the right way to build out portfolios, it should alleviate some fear and uncertainty when markets sell off and allow us to be patient investors as we know we do not need to sell our stock assets that are down to get cash for you to spend. Therefore, we can be patient, make tweaks and allow the high-quality assets that you own to come back. And we are confident they will.
Those with excess cash that have been waiting for a better entry-point to step into markets are getting a great opportunity to put money to work. In turn, we have been tactically buying stocks that we feel have been unjustly oversold and pulling forward client “walk-in/dollar-cost averaging programs” to take advantage of these dislocations and selling pressure. In addition, if you are making contributions to 401(k) plans, Traditional or Roth IRAs, SEP IRAs, etc., we would recommend trying to speed up those contributions to take advantage of these better long-term entry points.
While we came into this period on solid footing and will continue to make tweaks to client portfolios, it would be imprudent to completely overhaul a portfolio in response to the environment. There is just too much uncertainty, and a material portfolio shift would be acting as if we know what the market is going to do next, which is impossible. We live in a world of possibilities, but we have to make decisions based on probabilities. As mentioned above, we are weighing those probabilities every day. We know how tough it is right now and we appreciate the trust you have put in our firm. We are here and welcome a discussion at any time. We will get through this.