Most analysts did not anticipate the volatility that
investors would face in the first quarter of 2025.
The equity markets started the quarter with
strong momentum, buoyed by President Trump's
return to leadership of the world's largest
economy and financial markets. After achieving
impressive annual returns of over 20% in both
2023 and 2024, the equity markets reached
another all-time high in February. Experienced
investors knew that a market retreat could happen
at some point during the year, as it is historically
common for a pullback or correction to follow
such positive performance. In the latter half of
the first quarter, uncertainty took center stage in
the headlines, leading to a swift and widely
reported market decline.
The new administration came in as it indicated it
would, and President Trump’s first agenda was
to make quick and sweeping change. The
transitional time between new administrations
typically brings some uncertainty and thus
volatility, so it has been hard to predict the
reaction to the aggressive agenda of this
administration. Optimistic investor sentiment
quickly dampened as campaign promises began
to come to fruition. Some investors have become
wary, and concerns over global trade wars and
the tariffs have added to uncertainty.
A correction is defined as a decline of more than
10% from a recent closing high. On March 13,
the S&P 500 fell 10% from its high set just three
weeks prior due to easing inflationary pressure
and positive earnings. The Dow Jones Industrial
Average (DJIA) started its path toward
Quarterly Economic Update
First Quarter 2025
(252) 451-0488
www.StrategicFreedom.com
Anthony (Tony) Engrassia, ChFC, LUTCF, NSSA®
Certified Financial Fiduciary®
correction territory but remained just above a
10% decline. Additional factors contributing to
these declines included government employee
layoffs, the possibility of a government
shutdown, trade war probabilities and concerns
about
an
uptick
in
inflation.
(Source:
Investopedia.com; 3/13/25)
The S&P 500 and DJIA entered the first quarter
with positive momentum, after having both
reached all-time highs in December 2024. The
“Magnificent Seven” composed of Apple,
Microsoft, Nvidia, Alphabet, Amazon, Meta and
Tesla were the driving forces behind the U.S.
stock market’s strength in the past two years. As
a group, they accounted for more than 50% of the
S&P 500’s return in both 2023 and 2024. That
leadership continued through early February,
however after a rough March, as a group, these
tech stocks experienced their worst month and
quarter on record. By March’s end, the S&P 500
registered its most difficult quarter since the
second quarter of 2022. The S&P 500 closed the
first quarter of 2025 down 4.6% and the DJIA
closed the quarter down 1.3%.
(Sources:
CNBC.com; 3/31/2025, First Trust 1/8/2025)
After experiencing three interest rate cuts in the
latter half of 2024, the Federal Open Market
Committee (FOMC) decided to maintain steady
interest rates during the first quarter of 2025.
Current Federal Funds interest rates are in the
range of 4.25% to 4.50%.
In February, the unemployment rate was 4.1%, a
slight
increase
from
January’s
4.0%.
Government employee layoffs began during the
quarter, and federal government employment
declined by 10,000 in February, though
government payrolls, when including state and
local numbers, overall rose by 11,000. (Source:
cnbc.com; 3/7/25)
As financial professionals, we are committed
to keeping our clients aware of any changes
that could directly affect their situation. Our
goal is to consistently review our clients’
investments and confirm they align with their
time horizon, risk tolerance and goals.
KEY TAKEAWAYS
• After two robust years for equities, the
S&P 500 entered correction territory in
the first quarter of 2025.
• The new administration brought many
changes. Talks of tariffs have created
confusion and uncertainty for equity
markets.
• The Fed held the federal funds rate range
steady at 4.25 – 4.5% after three rate
cuts in the latter part of 2024. As of
March, they are still forecasting rate cuts
in 2025.
• Better than expected inflation numbers
came in showing that U.S. inflation
decreased to 2.8% in February, down
from 3% in January 2025.
• Bonds present a less volatile alternative
to equities and an additional option for
those looking to diversify their portfolio.
• Focusing on what you can control and
minimizing
your
exposure
to
inflammatory news can help you stay
well-grounded in times of volatility.
• Market declines are part of the
investment experience and maintaining
the consistency of a well-devised, long-
term focused plan has historically served
investors well.
• We are here for you to discuss any
questions or concerns you may have.
•
Tariffs
Tariffs have become a nightly news agenda item
and widely discussed topic and there are sizable
concerns about their potential impact on the U.S.
economy. The Trump administration is actively
implementing several tariffs to protect domestic
industries and boost sales of American-made
products by taxing imports from countries like
China, Canada, and Mexico. This includes a 25%
tariff on all foreign-made cars, which is set to
take effect in the second quarter. The White
House has suggested that their tariffs will grow
the American economy, help reduce our deficit
and create jobs, but as of the quarter’s end has not
issued complete guidance or specifics including
how long they will be in place. For now, it
remains uncertain how much these tariffs will
affect the economy and inflation moving
forward. Change always brings uncertainty,
which remains a primary theme as the new
administration’s overhaul is bringing growing
and transitional pains in many areas of the U.S.
government. We remain committed to keeping
a watchful eye on these tariffs and their effects
on our client’s investment portfolios.
Inflation & Interest Rates
Key Points:
• Interest rates remained unchanged at 4.25
– 4.50% during the first quarter of 2025.
• The Fed is still forecasting rate cuts in
2025.
• U.S. inflation decreased in February to
2.80%.
In the Federal Reserve Press Release on March
19, 2025, the committee stated, “Economic
activity has continued to expand at a solid pace.
The unemployment rate has stabilized at a low
level in recent months, and labor market
conditions remain solid. Inflation remains
somewhat elevated. (Source: Federal Reserve Press
Release; 3/19/25)
In the first quarter of 2025, the Federal Open
Market Committee (FOMC) decided to maintain
interest rates in the range of 4.25% to 4.50%.
This
news
positively
influenced
investor
Tariff Basics
A tariff is a tax on goods
that are imported or
exported between
countries. Tariffs are a
type of trade barrier that
can raise prices and
reduce the availability of
goods and services.
How do tariffs work?
•
Companies that import foreign goods pay
the tariff to the government.
•
Tariffs can be a percentage of the value of
the imported product.
•
Tariffs can also be a flat tax charged on
each imported good.
Why are tariffs used?
•
Tariffs are used to protect domestic
industries and jobs.
•
Tariffs can also be used to punish or
discourage actions that a country
disapproves of.
What are the effects of tariffs?
•
Tariffs can increase the cost of production
and the cost to the consumer.
•
Tariffs can create tensions between
countries and lead to trade wars.
•
Tariffs can negatively affect the stock
prices of companies that rely on imported
goods.
sentiment, leading to a brief rise in
stock
prices
following
the
announcement.
The
Federal
Reserve indicated that rate cuts
are still possible this year,
depending on whether inflation
continues to decrease, and the job
market remains robust.
During
the
March
FOMC
meeting, the committee noted that
it anticipates the economy will
slow down more than previously
expected this year. At the March
Press
Conference,
Federal
Reserve Chair Jerome Powell
stated, “some near-term measures
of inflation expectations have
recently moved up." He continued, “We see this
in both market- and survey-based measures, and
survey
respondents,
both
consumers
and
businesses, are mentioning tariffs as a driving
factor. Beyond the next year or so, however, most
measures of longer-term expectations remain
consistent with our 2% inflation goal.” (Source:
forbes.com; 3/22/25)
Good news emerged with lower-than-expected
inflation numbers reported, showing that U.S.
inflation decreased to 2.80% in February, down
from 3% in January 2025. Nonetheless, inflation
pressures remain a concern in the coming months
as we see how tariffs affect the economy and
spending. (Source: cnbc.com; 3/12/25)
The
current
economic
climate
presents
significant uncertainty, and the FOMC is acutely
aware of this, much like investors, who find
themselves in a “wait and see” situation. Chair
Powell expressed during the March press
conference, “We’re going to have to see how
things actually work out.”
In February, the Consumer Price Index (CPI) for
both core and all-items increased 0.2%. On a
year-by-year basis, inflation was 2.8% and core
inflation was 3.1%. The core CPI, which
excludes food and energy prices, is often viewed
by economists as a better gauge of future
inflation. The increase in shelter costs in
February accounted for nearly 50% of the overall
CPI rise. (Source: cnbc.com; 3/12/25)
The FOMC is vigilant in monitoring key
economic indicators, including labor market
conditions, inflation pressures and expectations,
as
well
as
financial
and
international
developments. With two FOMC meetings
scheduled for the second quarter and four more
planned for the second half of the year, the Fed
remains committed to the possibility of interest
rate cuts contingent upon inflation trends and
economic conditions.
Interest and inflation rate movements are
integral for investors' financial planning, and
we will continue to monitor these key
economic indicators closely.
The Bond Market and
Treasury Yields
Key Points:
• The outlook for bonds in 2025 remains
unclear. Interest rates, inflation trends,
and clarity on tariffs, are all contributing
to higher yields, however they remain
sensitive to ongoing uncertainties.
• Current bond yields could present an
appealing option for investors seeking
more stability against market volatility.
Multiple factors are keeping U.S. Treasury yields
higher, including economic uncertainty, a
reluctant inflation rate, and unchanged interest
rates. During the quarter, yields still experienced
slight ups and downs. A rally was seen earlier in
the quarter but was quickly undone as investors
rode the fence of uncertainty due to tariffs and
trade decisions that were still up in the air in the
first quarter.
U.S. Treasury long-term yields rose to their
highest levels in over a month on March 27. On
March 31, the benchmark 10-year yields reached
4.23% and 30-year yields hit 4.59%. The shorter-
term 2-year and 5-year yields were 3.89% and
3.96% respectively. (Source: U.S. Department of
Treasury)
Bonds have an inverse relationship with interest
rates—when one goes up, the other usually goes
down. Bonds have historically been less risky in
times of market uncertainty. If interest rates
continue to fall, bonds should appreciate. This
first quarter, however, interest rates were
stagnant. Should inflation gain more momentum
as feared, interest rates could remain in
stagnation mode or even rise.
Diversification is an important strategy for a
well-balanced portfolio and bonds can be a good
defense play against market volatility. Bonds can
offer stability and a steady interest income during
times of market decline. We consider using them
for clients based on each client’s unique
situation.
Please
remember
that
while
diversification in your portfolio can help you
pursue your goals, it does not ensure a profit or
guarantee against loss.
Investor’s Outlook
Key Points:
• More changes are likely to come, and
volatility is likely to remain during this
transitionary period.
• Focusing on what you can control is
important. Proactive planning with a well-
diversified portfolio that takes into
consideration your risk tolerance and time
horizon is advised.
• Investing is a long-term activity, and
short-term
fluctuations
should
not
sidetrack you from your long-term goals.
• Collaborating with a qualified financial
professional can help you understand
market conditions and if and how they
may affect your overall strategy.
Heading into 2025, investor sentiment was
primarily optimistic, with
a sprinkle of
anticipation and caution. This sentiment changed
quickly as the new cabinet was ushered in and a
deluge of changes began coming to realization.
The major disruption came when tariffs were
discussed and confusion heightened.
More changes are still being discussed in other
sectors of the government, including tax policy
especially with the 2025 sunsetting of the Tax
Cuts and Jobs Act provisions.
While no one can predict the future, strategists
have been adjusting their year-end forecast. As
you can see from the image, as the S&P 500 went
into correction land in March, strategists from
major banks slightly lowered their initial year-
end targets. “We’ve revised our year-end S&P
500 target to 6,400, down from 6,600, reflecting
the anticipated impact of tariffs on earnings
growth. Despite this adjustment, we still foresee
meaningful upside driven by positive US growth
and robust AI demand,” UBS stated. “While we
do expect ongoing uncertainty and volatility in
the near term, our base case is that tariffs will not
derail the economy. We expect the US economy
to grow close to its 2% trend this year,” UBS
added. (Source: seekingalpha.com; 3/31/2025)
Increased talk of a recession is being revived in
the news. Analysts like Lori Calvasina of RBC
Capital Markets, however, currently do not feel
a recession is on the horizon. "Some economic
forecasters around the Street have started to dial
down their 2025 GDP forecasts, but are not
calling for a recession," Calvasina wrote to
clients mid-March. "Historically, the dialing
down of economic growth on its own presents a
significant headwind for the stock market to
overcome." (Source: finance.yahoo.com; 3/17/25)
The bottom line is that uncertainty is dominating
the headlines and investors will continue to seek
clarity about many things in the coming months.
Change usually comes with some volatility. How
investors and savers navigate this volatility and
uncertainty is vital for the direction of their
financial goals. One of the most important things
to remember is that investing is a long-term
activity.
We urge you to remember what is in your control,
and what is not. Some things you cannot control
are tariffs and trade wars; adjustments to
monetary policies; the inflation rate; interest rate
changes; and how equities will respond to these
and other issues.
What you can control is how you react. Three
major things you can control are:
1. Your behavior
2. Your risk tolerance or appetite; and
3. Your time horizon.
If you have a firm grasp of each of these, you
should be able to maintain discipline and remain
calm when volatility and market fluctuations
arise.
The first thing you should keep in mind is not to
panic. In times of market volatility, investors
tend to become unnerved and anxious. Most
often, this is not the best mindset to make rational
decisions.
Risk tolerance or appetite is the degree to which
you are able or willing to withstand fluctuations
in the stock market and your portfolio in return
for growth potential. Knowing what your risk
appetite is and having risk awareness should be a
part of your financial strategy. If this changes
then you need to call us.
Your investment time horizon is another vital
component that you can control. Knowing how
much time you have to reach your goals will help
you determine other key elements like your risk
tolerance. While no one can determine what will
happen in equity markets during either the short-
or long-term, if your horizon is longer, you may
have more choices or a willingness to take on
more risk. For example, an investor who can
commit to a 10-year time horizon can consider
different selections, as compared to someone
who needs to use that money in six months.
So, what should investors do?
Remember, the past two years have been
exceptional for the U.S. stock market. Seasoned
investors know this cannot always be the case,
and that at some point a market correction would
be inevitable. Corrections are unpleasant, but
they are a part of the investing experience. As a
reminder, the term “correction” is used to
describe downturns of 10% to 20%, because
historically, the market drop often "corrects" and
returns equity prices to their longer-term trend.
Regardless of whether equities are rising or
falling, investors should always put their main
focus on their own personal objectives. If you
need to, revisit your financial plan to make sure
you are still situated on the best path toward your
goals. Understanding changes in your time
horizon and risk tolerance should be a part of
your review.
As a reminder, equities should be viewed
primarily as long-term investments and investors
should be prepared to hold equity positions for at
least three to five years or more. Short-term
volatility comes and goes and should not distract
you from your long-term plans. A well-crafted
plan incorporates the fact that equities do not
move in a straight line and can withstand the
inevitable fluctuations of the markets.
Inflation is relatively moderate compared to
previous years, but it is still above the Fed's target
of 2%. While the Fed still forecasts the
possibility of rate cuts in 2025, uncertainty is
prevalent, and recent years have taught us to
remain vigilant and prepared for unexpected
circumstances.
Regardless of what happens moving forward, it’s
still wise to “proceed with caution.” We also
want to reiterate that in times of volatility, we
know that the temptation to deviate from your
long-term strategies can arise. Please remember
that “cashing out when fear takes over,” could
result in missing out on the gains from a market
recovery. Market downturns can be temporary
and potentially even open a window of
opportunity for good entry points into equities.
We stand by our belief that investing is a long-
term activity and that a well-planned, long-term
strategy that considers market volatility, time
horizon, and risk tolerance, is the best practice for
savvy investors. Rebalancing and appropriate
diversification are important for all our clients.
We believe in proactive preparation, and our aim
is to provide you with a solid financial strategy
that is thoughtfully designed for all market
environments.
As always, you should stay informed about the
news but minimize your exposure to avoid
getting caught up in speculative claims,
unfounded predictions and fearmongering.
2025 is definitely a year of change for the U.S.
As stewards of our clients’ wealth, we will
continue to monitor areas we feel are important
to their financial situation and understand that the
current changes are bringing uncertainty and
increased market volatility. We are here for our
clients should they feel apprehensive about their
portfolio and financial plans.
We stay apprised of any changes to our client’s
personal situations such as divorce, health issues,
selling of property, or any changes to their risk
tolerance or time horizon. Additionally, we
always recommend discussing any changes,
concerns, or ideas they may have with us before
making any financial decisions. Keep in mind
that there are often other factors to consider when
altering anything in your financial plan, such as
tax implications. The more knowledge we have
about their unique financial situation the better
equipped we will be to best advise them.
Our goal is to exceed our client’s expectations.
We take pride in offering a high-level service that
includes
consistent
and
meaningful
communication throughout the year. Our team
is here to help clients with every step of their
journey toward their financial goals.
We value our clients and are accessible to
them. If you would like to explore our services,
feel free to contact us with any concerns or
questions you may have.
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advisor does not imply a certain level of skill of training. Wealth Management Strategies and PCA are separate, non-affiliated entities. PCA does not provide tax or
legal advice.
Sources: cnbc.com; treasury.gov; bigcharts.com; Department of Treasury; firsttrust.com; Federal Reserve Press Release; finance.yahoo.com; seekingalpha.com;
Investopedia.com; forbes.com; U.S. Department of Treasury. Contents provided by the Academy of Preferred Financial Advisors, 2025
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