Our last quarterly piece predicted an uptick in volatility in 2025, and that certainly came true. It feels a little strange to comment on the first quarter of 2025 when so much happened in the first half of April. We wrote a stand-alone piece on the tariffs and uncertainty, so if you haven’t had the chance to read it, take a look here. In Q1, the S&P 500 declined by 4.3%. Energy was the top performing sector, and Large Cap Value outperformed Large Cap Growth. Outside of the U.S., the MSCI EAFE rose 2.2%, continuing its relative outperformance against U.S. equities. U.S. bonds were up 2.8% in Q1.*
It may be hard to fathom now, but the S&P 500 actually hit new highs in Q1 as the market’s reaction to President Trump’s pro-business agenda was initially positive. However, uncertainty around tariffs and economic growth quickly disrupted the gains investors were used to in 2024 and 2023. Earnings estimates are being revised downward as growth and inflation concerns are becoming more widespread. The odds of a U.S. recession in 2025 are edging upward as business and consumer sentiment are turning negative. After two very positive years in the market, a significant downturn and increase in volatility can feel more disruptive than usual for investors.
Inflation and Unemployment
Inflation remained above the Federal Reserve’s 2% target in March, with U.S. core CPI rising 3.1% year-over-year. The unemployment rate moved slightly higher to 4.1%, although there is concern that those numbers will rise as the layoffs and firings inside the government sector have yet to be reflected. In response, the Fed kept the Fed Funds Rate unchanged and has reiterated that they won’t lower rates if inflation remains a concern.
Tariffs
Looking forward, uncertainty and volatility remain top themes. Even if tariffs are limited to China, a trade war would still be costly. U.S. exports to China, including oil, aircraft, soybeans, and grains, support hundreds of billions in trade and thousands of jobs1. Disruption in these sectors could ripple across the broader economy.
Most of our potential allies currently have tariffs hanging over them as well, and unless a deal is made, those allies may find it more cost-effective to trade with China. If the rest of the world believes the U.S. is no longer a sound investment, stock prices and the dollar will continue to decline, and interest rates will rise. Rising interest rates increase consumer and business costs, decrease spending, and slow economic growth. With U.S. GDP expectations already lowering, speculation around a U.S. recession is increasing.
What’s Next?
It’s our opinion that volatility will become the norm until any meaningful long-term data can be confirmed on tariffs and their economic impact. Markets need forward-looking data to accurately price stocks, and when data changes daily, it makes that calculation nearly impossible.
Inside of our allocations, we’ve moved closer to benchmark targets, moving overweights out of sectors like U.S. Large Cap Growth, which has run up after the last two years and allocating back to Large Cap Value. We have two active managers in U.S. Large Cap Value and International Developed that should be able to capitalize on some of the market volatility and valuations. We’re also focusing on tactical tax loss harvesting where appropriate. Remember, diversification keeps you insulated from the sharp drawdowns of a single index, which is why owning U.S. stocks, international stocks, and an appropriate allocation of fixed income is important.
Holding Steady
Times of uncertainty and volatility in the market are historically the worst times to make changes to your equity allocation, which is why it’s so important to keep a long-term view and have allocations that align with your personal goals and risk tolerance.
It can be frustrating to hear that the best thing you can do as an investor is to tune out the short-term noise. That sentiment is not meant to discount the feelings that volatile markets can produce. Just because down markets are a part of investing doesn’t make them any easier to experience. Having a long-term, personalized plan should allow you to weather difficult markets without making emotional investment choices. Looking back, some of the worst markets ended up being great buying opportunities, while others took a lot longer to find a bottom. At SIMA Wealth Partners, we work closely with our clients to guide them through market volatility and ensure their investment strategies match their long-term goals. If you have questions or want to review your current plan, reach out through our contact form or call us at (804) 285-5700.
*Individual returns will vary based on percentage allocated to equity, fixed income, and cash
1. States that export most to China include Texas, California, Louisiana
Heather A. Voight, AIF® | Portfolio Manager
Previous Market Commentaries
Tariffs and Market Volatility: What Investors Need to Know
2024 Third Quarter Market Commentary
2024 Second Quarter Market Commentary
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