Qrt 1 2025

First Quarter 2025 Newsletter

  April, the most capricious month. William Cowper, an English Poet who has been recognized as perhaps the greatest English letter writer, penned in one of his published letters, “it is a sort of April-weather life that we lead in this world. A little sunshine is generally the prelude to a storm.” As our weather has been this month; warm sunny days coaxing fledgling crocuses and hyacinths to blossom, only to be slapped in the face with sleet and snow. One day a light breeze invites you out for a walk, the next, a ferocious wind like the infamous wolf huffing and puffing at your doorstep hoping to blow the roof in.

  Wilder than the weather, this April has been a storm in the financial markets, propelled by the unexpected scope and size of tariff increases announced by President Trump on “Liberation Day” and the speed with which they were to take effect. Fears escalated as economists, market analysts, and the Fed began to grapple with the potential fallout of a worst-case scenario in the Tariff War. Days later, Trump announced a 90-day moratorium for most countries (China being a notable exception), giving time for negotiating agreements, and at least for now, chasing the wolf from the doorstep.

   On 4/7, domestic markets opened in bear territory with foreign markets having tumbled earlier in the day. After a roller coaster, the Dow ended the day down 349 points, S&P, after extreme volatility, closed down just 0.23%, notching its biggest bottom to top intraday reversal (almost 11%) since Nov. 2008, at the height of the financial crisis. Noted by Advisor Hub in Bloomburg, this was “even higher than the Flash Crash on May 2010,” and NASDAQ had the largest intraday rally since 2008, closing up 0.1%.[1] On 4/9, President Trump announced the 90-day moratorium. Matt McAleer of Cumberland Advisors in a video on 4/11 stated that the “intraday movement in the previous 5 days exceeded 6% a day,” a level which he noted had been matched only 5 times in 40 years.[2]

   Franklin Templeton’s “What Happened Last Week,” illustrate the volatility we experienced over the last few weeks. On 3/7, S&P, DJIA, and NASDAQ were all in the green for a 1-year return by double digits. Year-to-date, both S&P and NASDAQ had turned red. NASDAQ was down 5.7%, DJIA held onto a 0.9% gain, and on 4/4, S&P YTD was -13.4%, DJIA -9.5%, and NASDAQ -19.1%!

   On a 1-year roll, S&P was down 1%, NASDAQ down 2,2%, and DJIA hung on to a positive 1.0%. After the week’s wild ride, all three ended the week in the green: S&P up 5.73% for the week, DJIA up 4.97%, and NASDAQ up 7.30%. YTD returns reflected the net damage that had been done despite the rally, with S& P down 8.5%, DJIA down 5%, and NASDAQ still down double digits at 13.2%. But the 1 year returns for all 3 indices were in the green again, S&P 4.6%, DJIA 6.4%, and NASDAQ 2.4%. Franklin Templeton has not yet published results for the week ending 4/17, a 4-day trading week, at the time we write our newsletter; but market watchers were breathing a guarded sigh of relief at week’s end. Matt McAleer of Cumberland Advisors said, “we’re encouraged the week was one of backing and filling and not giving back all the gain in the previous week’s rally.”[3]  

   While it is too soon to say whether the worst is over, portfolio managers and advisors had a chance to measure the effectiveness of their defense systems while we were at the height of the volatility. We have had time to think about what might come out of the 90-day tariff moratorium; economists have begun to incorporate developments in the past 5 weeks in their outlooks, and the Fed has wrestled with what all this means to their initial goal for 2025 of continuing to lower interest rates in hope of keeping inflation in check while avoiding a recession for the economy. 

   Matt McAleer and his group are still playing defense, checking to be sure their clients are all still comfortable with the portfolio they are in, and are reminding us that investors with relatively long term goals need to also remember, the path from point A (where they started their investment plan) to point B (where their nest egg ends up), is not a smooth and steady climb. There are hazards, and downright scary events along the way. Matt points out that big draw downs, such as we just experienced, have created some of the best buying opportunities. He discusses in his video that they try to fight the crystal ball believers and keep an open mind. “We don’t have it all figured out,” he says. After a market event like this, new leaders may emerge, and recent outperformers may struggle.[4]

   Alliance Bernstein’s 04/11 Market Update discussed what might still be problematic even if the 90-day Tariff Moratorium is largely successful. They point out that the moratorium left in place a 10% tariff in most countries and, of course, excluded China completely. Current tariffs between China and the U.S. are 145% for China’s goods and 125% for U.S. Goods. "If the 10% universal tariffs stay in place, we think these policies combined with cuts in U.S. Domestic Spending and government jobs, would reduce growth in 2025 U.S. GDP to 0.5% - 1%, with a substantial chance of recession."[5] Others point out there are bright spots in our business economy even if tariffs remain high. Dr. Joanne Ferry of Advisors Cap Management, recently wrote, “despite ongoing tariff tensions, the U.S. is still prioritizing domestic semiconductor growth. She expects that demand for AI related capabilities will remain strong.[6]

   Jamie Dimon, well known CEO of JP Morgan, issued a letter to shareholders on 4/7 discussing how they’ve adjusted their economic outlook for 2025 from an earlier view; pointing out, “prior to Trump’s tariff announcement, what had been a healthy economy was already weakening. . .Part of the economy’s performance over the last few years has been driven by extraordinary deficit spending and the quantitative easing that took place. . .since Covid.” [7] We have discussed in recent newsletters the likely impact of unwinding quantitative easing and reducing deficit spending. The Fed began reducing interest rates last year in hopes of avoiding recession and realizing lower rates would be a powerful tool in tackling national debt. It also had a firm commitment to keeping inflation in check. The 1st quarter showed we’re still dealing with sticky inflation. Recent developments involving tariffs and downsizing government, have left them reconsidering when and how much interest rates can safely be dropped. On 4/17, Chairman Powell spoke on the subject; saying the Central Bank, “will wait for greater clarity” as it weighs the risk of a slowing economy causing a recession if rates are not cut, and the risk of inflation getting out of control again. “We may find ourselves in the challenging scenario in which our dual - mandate goals are in tension,” as the Fed is obligated to keep prices stable while maximizing employment.[8]

   Concern the Fed will not lower rates to the extent that had been expected is another worry for both the Equity and Bond Market, which had its own crazy ride. On 4/4, the 10-yr Treasury reported at 5.7%, US Bonds 3.7%, and Munis at 1.3% YTD. One-year performances were 6.5%, 6.4%, and 3.3% respectively. On 4/11 the 10-yr Treasury was down 3.45% for the week and held onto a positive 2.1% YTD. U.S. Bonds were down 2.54% for the week and clinging to a positive 1.1% for YTD. Munis fell 3.99 % for the week and went negative YTD by 2.8%.[9]

   The extreme volatility in the 10-yr Treasury was unprecedented. Chairman Powell said in his Shareholder Report he suspected the volatility was caused by Hedge Funds unwinding leveraged positions. Additional factors cited by various analysts were banks raising cash for clients needing more liquidity if the Trade War worsened, investors needing cash and not wanting to sell equities into the sell-off, and foreign countries selling Treasuries perhaps in retaliation to trade tensions.[10] Municipal bonds had their own wild ride. By Friday morning, 4/11, after a week of extreme volatility in the markets and many pending new Muni issues being pulled, investment grade municipal bonds in the intermediate to long term range were yielding close to or at 5%. The buying opportunity did not last long. Bond funds were sellers of bonds throughout the week, needing to raise cash, per John Mousseau of Cumberland Advisors.[11] But on Friday morning individual investors were buyers, taking advantage of a rare and short-lived opportunity to buy investment-grade federal tax-free bonds at near 5% yields.

   The last several weeks have been stressful for investors and for portfolio managers. Although we have been through times like this before, no one feels comfortable when the wolf is huffing and puffing at your door, even if you have built a brick house. However, time has taught having a plan that suits your goals and risk tolerance, and sticking with it in the best and worst, and all the time in between, has a high rate of success. We understand and facing any significant turbulence is extremely uncomfortable, even for us, but we’ve built a game plan to handle these situations and practice our strategy consistently. Defending capital when situations call for that protection, keeping an open mind, and looking for opportunities to capitalize on panic selling, we can ride out the storm, and reach our goals in the long-term. We are following our process and have been both sellers and buyers to a modest degree during this period. This may be one of those times when momentum switches to new market leaders.  We are prepared to make changes if needed to best position ourselves for what lies ahead. 

   If you are having concerns about your plan and goals; if you are having trouble sleeping at night, reach out to us. Whether bulls, bears, or wolves, we’ll get through 2025 together and continue working our investment plans. As always, we appreciate your trust and your business.

Sincerely,

The Galarneau Group