Indices YTD Performance (1/1/2025- 3/31/2025):
Source
We started off the year strong — stocks were positioned for continued growth, selective tariffs, deregulation, lower taxes, and more investments in the US economy.
All positive indicators that the markets would continue trending higher.
Now, the landscape has certainly changed. The S&P 500 peaked on February 19th at around 6,144 and has fallen sharply since.
As I’m writing this, the markets are selling off substantially and we are seeing some capitulation. Keep in mind we just went through the fifth-fastest correction since WWII.
Not something that gets investors too excited. And let me tell you, people are nervous.
Sentiment has changed, year-end forecasts are coming down (but those are pointless anyway), and we have no clear sight on how all of this will shake out.
But let’s break it down into three key factors…
Tariffs: A Reality Check for the Market
Coming into the year, investors expected modest, selective tariffs — the uncertainty of the tariffs alone was enough to spook the markets.
But now that 'Liberation Day' has passed, it’s clear that these tariffs are larger and more aggressive than many expected.
To be clear, tariffs are essentially taxes on imported goods, paid by companies that import them, not by foreign governments. Those costs then get passed along, in part, to us, the consumers. While some importers may absorb a portion of the tariff or negotiate lower prices with suppliers, the burden is spread across multiple parties.
Critics of tariffs characterize them as a tax, inflationary, anti-growth, and a recipe for recession. Others would argue that a mix of tariffs, lower taxes, eliminating government waste, enhancing government efficiency and regulation will spur long-term prosperity.
Regardless, tariffs make things more expensive in the short-term and rattle supply chains.
Now, who the f*** knows what his end game is. Part of this is a negotiation tactic, but in the short-term, it’s crushing stocks and raising fears of continued inflation.
Businesses need clarity to make investment decisions. The current unpredictability can cause many businesses to put a pause on major investments and consumers are front loading purchases to get ahead of the tariffs.
The questions remain: What will actually be implemented, and when? How big is the inflationary impulse? To what extent is it counterbalanced by slowing demand from freaked-out consumers?
It remains to be seen…
Interest Rates: Uncertainty Rules the Day
The Federal Reserve has been caught in a whirlwind of conflicting economic signals. We have seen sentiment in the gutters and signs of the economy slowing. Coming into the year, the expectation was for rate cuts later in 2025, but now the question is whether rates will hold steady or be cut sooner than expected due to market turmoil.
One argument could be made that this is what the administration wants. Lower interest rates will allow them to issue long-term debt at lower rates and help the budget deficit.
As a consumer, lower interest rates help those looking to take out mortgages or refinance high-interest debt. We have started to see mortgage rates come down, albeit slower than most want.
The good news — the Fed is in a position where they can bring rates down to help.
Diversification: A Safe Haven Amidst Chaos
While everyone loses their minds and assumes they have lost a lot of money year-to-date, that is not the case for everyone…
Yes, the S&P 500 fell 5.75% in March alone, but a well diversified portfolio may still be up slightly YTD. Well, probably not after today…
But this is a great reminder on why you want a diversified portfolio. The past few years has been a handful of names driving the market returns, and mostly technology companies.
Yet value stocks just outperformed growth stocks by 12% in Q1, the highest since Q1 2001:
Look at gold…
Most bond funds are up YTD. International stocks are up over 7% (!) in Q1. Sectors like energy, healthcare, and utilities have also held up well.
The reality is that markets move in cycles. I remind you yet again that the S&P 500 was up over 20% in 2023 and 2024.
Not many people were open to the idea of trimming some of their positions while the market was up. No, they wanted to keep buying because everyone was making money.
Now? Many people want nothing to do with the stock market. This behavior happens over and over. No matter how many times you tell people, they keep trading on their emotions.
They know that Buffett has said, “you want to be greedy when others are fearful, and fearful when others are greedy”.
But what the hell does he know, right? He’s 94 hiding out in Treasuries, he lost his fastball!!
Yeah, ok buddy.
Remember, they told us we need to take our medicine. This is just a “little disturbance” or rather a “period of transition”.
The Treasury Secretary Scott Bessent said it himself three weeks ago, “I’m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.”
We’ll see how long they are able to maintain that mindset.
Just remember you want to sell at the wedding (when stocks are up) and buy at the funeral (on days like today!).
What Comes Next?
Anyone who claims they know how the next eight months will play out are full of shit. I expect the choppy market environment to persist over the next several weeks and likely months. Sentiment is in the toilet, mostly because people are upset with the politics and their feelings are hurt.
Q1 earnings calls shouldn’t be that bad, people were front loading purchases and still spending in the first three months of the year.
But my god you better be sitting down when they issue their Q2 guidance. It’s all a game though — they will mention “uncertainty” and “tariffs” a lot. Lower the bar immensely to set the stage for easier beats in later quarters and then see their share prices pop.
Economic softening could give the Fed room to cut rates, which would provide some relief. If tariffs end up being less severe than expected, markets could rebound quickly.
Meanwhile, how quickly we ignore the potential long-term positive impacts—potential reshoring of jobs, adjustments to trade relationships, and productivity gains from AI-driven investments.
Yes, this will take time to materialize but could ultimately strengthen the economy. I just wish some of this was done more methodically.
Remain patient and have some perspective. Pessimists sound smart, but optimists make money.
For long-term investors, the plan remains the same: stay invested, stay diversified, and take advantage of opportunities when presented. There are a lot of attractive opportunities at the moment if you have the stomach to ride this rollercoaster.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.