In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
1st Quarter 2025 Commentary
Concerns about the economy, tariff turbulence and an informal rebranding of the “Magnificent 7” to the “Maleficent 7” sent stocks lower in the 1st quarter. The S&P 500 struggled to recover after entering correction territory (a decline of 10% or more) in early March and finished down 4.6% for the quarter. The largest tech names that comprise the Magnificent 7 stocks were the primary drivers of the decline. Excluding these stocks, the S&P 500 gained .4% in the quarter.
Economy Update
The economy is still stable and growing – inflation is low at 2.54%, the unemployment rate is stable at 4.1%, and interest rates are expected to continue declining modestly this year. Growth is slowing though, and the Conference Board U.S. Economic Outlook is now predicting below-trend economic growth in the 1.3%-1.8% range for 2025.
In this slowing but stable economy, cracks are emerging. Consumer confidence declined for the fourth consecutive month in March, a sign that financial stress among Americans could be accelerating. Tariffs could increase prices, slow hiring and lead to a recession, depending on how broad the tariffs are and how long they last.
Stock Market Update
What does this mean for investors and markets? It depends…investors with heavy concentrations in the Magnificent 7 stocks where sentiment has soured, have seen double-digit declines this year. Since these stocks make up a disproportionate share of the S&P 500 index, just a handful of stocks led the decline in the S&P 500 in the 1st quarter. In contrast, international stocks and sectors like energy, health care, utilities, and consumer staples all posted strong returns in the 1st quarter.
Bond Market Update
In the bond market, U.S. Treasury yields have spiked this year, driven mostly by the consensus that interest rates will remain higher for longer. The higher–for–longer narrative is great news for bond investors. Yields on most CDs and high-quality corporate bonds are still in the 4% range across most maturities. We will likely see rates decline this year, but since the Fed is expected to keep rates relatively stable, we believe the higher-for-longer narrative will remain.
Portfolio Impact
In client portfolios, we’ve seen disciplined diversification outside of tech keep portfolios relatively stable, and the continued focus on high quality dividend growth stocks and a meaningful allocation to bonds should help provide stability in uncertain market conditions.
This past quarter we’ve been reducing stock allocations where appropriate to protect against downside risk. We have also been rotating out of short-term and variable interest rate investments like money market funds, and into specific maturity CDs and corporate bonds to lock in higher rates.
Bottom Line:
Uncertainty and caution are defining the economic and market mood as we enter the 2nd quarter of 2025. The economy and markets are stable, but vulnerable to shocks or a misstep in trade policy decisions. Until clarity emerges on the health of the economy and tariffs in the coming months, it’s difficult to determine whether this current correction is a hiccup or the beginning of a deeper decline.
