| Concern Over Tariffs Brings Markets Down
As we near the end of March, equity markets are down year-to-date, and in recent weeks, this trend has accelerated.
Year-to-date as of March 26th the S&P 500 was down 4.0%, the tech-heavy Nasdaq was down 5.3%, and the slower-growing companies of the Dow Jones Industrials were up 0.6%. Additionally, small-cap stocks, as represented by the Russell 2000 index, were down 6.9%, thus counteracting the enthusiasm we saw in January for a broadening market rally.
The CBOE Volatility Index (VIX) closed high at 27.9 on March 11th but fell to 18.5 by March 26th. 20 is considered stable, so this is a promising reading. However, cautionary financial media articles have increased investor fears.
On a positive note, fixed-income markets finished the month up, with the Bloomberg US Aggregate Bond Index up 2.0% year-to-date, which is higher than last year’s 1.3% return.
Economic Data
The Bureau of Labor Statistics (BLS) released the January CPI report on March 12th. They reported that headline CPI rose by 2.8% over the past 12 months, better than February’s 3.0%. The month-over-month increase came in at 0.2%, again lower than last month’s 0.5%, and went far toward calming inflation concerns.
A Federal Reserve meeting on January 29th preceded the above-referenced CPA report. In this meeting, the federal funds rate was held steady within the 4.25% to 4.50% range, and the Fed continued to make relatively hawkish statements similar to those made in December. Interest rates will likely be sticky, but the downward direction will continue with one further rate cut forecast for later this year. Additionally, the Fed could step in with more cuts if economic conditions materially deteriorate.
The BLS also reported strong February job growth in their March 7th report, with 151,000 new jobs versus January’s 143,000. However, the unemployment rate ticked up slightly to 4.0%. This jobs report was interpreted as strong enough for continued GDP growth but not overheated enough to fuel existing inflation concerns.
Tariffs – The Primary Market Concern
Tariffs and inflation are causing growing market uneasiness. Initially, the market shrugged off President Trump’s stance on tariffs as a tool for negotiating better trading terms with U.S. trading partners. However, this turned out not to be the case. Equity markets were rattled and are now in “correction” territory (down 10% from their peak).
Additionally, there is significant uncertainty around trading policy in general. The back-and-forth on tariffs and the realization that all policies, norms, and alliances with our closest trading partners are at risk have unnerved the market.
Unfortunately, these issues are ongoing, and President Trump shows little signs of slowing down.
Tariffs – Actions to Take
It is difficult to predict what course tariffs will take. What is clear is that many market participants remain hopeful a deal can be worked out with our major trading partners and that the tariff issue can fade away. If tariffs do stick, however, we are likely in for a period of stagflation (low GDP growth and increased inflation) or even a recession.
Given the current strength of the U.S. economy in terms of GDP growth, unemployment, wealth, and consumer spending, the U.S. is not likely to suffer a severe recession. Additionally, markets and companies will adjust. There will be winners and losers, but we will focus on opportunities in favorable sectors and companies. Diversification across many investment types, maintaining some liquid assets, and being prepared to make portfolio adjustments can help us get through this volatility.
Earnings – Hope for 2025
Earnings growth for the first quarter of 2025 is estimated to be 7.3%, following a robust fourth quarter of 2024. For 2025, annual earnings growth is projected to be 12.7%. This projected growth is lower than 2024’s 16.9% but still strong and remains above the 10-year average of 8.0% (from 2014 to 2023). This growth is an essential driver of continued market returns, and, given potential tariffs, these growth rates will be our prime focus.
In Summary
Equity markets can recover in 2025. However, volatility is likely to increase. A full-blown 25% level tariff policy will likely cause stagflation or a recession. However, the economy starts from a strong position, and U.S. companies remain well-managed, profitable, and innovative. Investment opportunities remain diversified, and we remain optimistic over the long term. Examples of these opportunities include adding additional exposure to quality dividend names, opportunistically pricing structured yield notes (which yield more when volatility is up), and being prepared to purchase interesting tech stocks that may trade at a discount. Our portfolios are solidly diversified and well-positioned for varying economic scenarios, including a higher-for-longer rate environment.
Sevasti Balafas, CFA, CPWA®
CEO & Founder
GoalVest Advisory
Sources: JP Morgan Asset Management, Bureau of Economic Analysis, Bureau of Labor Statistics, Morningstar, Factset, Slickcharts, and Ycharts
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