Q1-2025 Market Results
A somewhat disappointing quarter for the U.S. markets. The S&P 500, our preferred measure of U.S. stock markets, was down -4.27% for the quarter. Interestingly, International markets were up +6.88% for the quarter and Emerging Markets were up +2.98% for the quarter. Over the past decade it has been unusual for International or Emerging Markets to outperform the U.S. More on this below. Bonds had a positive return at +2.78% for the quarter. Short Treasuries were also up for the quarter at +1.61%.
Portfolio Thoughts
The S&P 500 started the year mostly flat before starting to drop in the middle of February. It flattened out again as we got to the middle of March. Bonds had a reasonably strong run from the start of the year. Although bonds had a good quarter, we are not convinced this is the start of the bond recovery we’ve been waiting for since 2022.
Q1-2025 Notes
First, it’s important to point out that the market being down a bit more than 4% is really not a dramatic move. Yes, after two very strong years in a row, this is something we are not accustomed to, but we aren’t even close to correction territory, which is normally at a level of being down -10%. We feel strongly that much of the market move has to do with the uncertainty brought to us from our new President, Donald Trump. Markets don’t like uncertainty and not knowing where things are headed; we get a lot of that uncertainty from Donald Trump. One example of that uncertainty is the tariff program he has been threatening since February and has launched as of April 2. Hence, we feel the market started moving in February. We think this is also why non-U.S. investments outperformed U.S. investments for the quarter.
As we’ve said before, we are not big Trump supporters or big Trump opponents. We are willing to see what his policies are and see what the results are. In the case of tariffs, many predict it will be a total disaster for our economy, but the truth is that we don’t have much historical evidence. No one has done what he is doing, so we don’t have much to compare. He did implement some tariffs during his first term, and they did not turn into a disaster, but they were nowhere near as broad-based as what he is now doing. Could the tariffs be bad? Yes. Might they also have some benefits? Yes. We don’t know exactly how it will turn out. So, the markets are down in the short term and will likely continue to be choppy and not recover until we get a better idea of the tariff repercussions. It could take several months before we have clear indicators.
As an instructive tool, let us give you one example of a current trade situation. Using the country of Germany for our example. The U.S. has a $84.8 billion trade deficit with Germany. This means that Germany sells us $84.8 billion more in goods than they buy from us. Greatly oversimplifying, that means U.S. consumers are buying a lot more Mercedes or Bavarian Motor Works (BMW) vehicles than German consumers are buying Cadillacs or Lincolns. The U.S. charges a 2.5% tariff on vehicles coming from Germany. Germany, on the other hand, charges a 10% tariff on U.S. automobiles. Germany also applies a 19% value-added tax (VAT) that applies to much more than German imports. But in this case, the 19% is applied to the vehicle’s total value, including the 10% tariff, which is like adding another 1.9%. This is precisely the kind of trade “unfairness” President Trump has been discussing. If Cadillacs and Lincolns going to Germany are marked up by over 10%, those vehicles may not be cost-effective and won’t sell.
Whereas the 2.5% tariff increase seen on German vehicles coming to the U.S. is a much lower impact on vehicle cost, and buyers are willing to pay the total. Based on this latest round of tariffs announced, Germany will see a much larger tariff posted on their vehicles imported to the U.S. Thus, vehicle buyers in the U.S. will see Mercedes and BMW prices increase, and those buyers might now consider buying a Cadillac or Lincoln instead. That would boost U.S. manufacturing and push the German trade deficit in the direction we think Trump wants.
Further, we believe President Trump is hoping that his tariff policy will not only push GM and Ford to make more Cadillacs and Lincolns but also push other manufacturers to shift their production to the U.S. and increase our manufacturing base. They would do this because making products in the U.S. avoids the tariffs Trump is threatening. This happened recently with automaker Hyundai, who just opened a plant in Georgia. If this does happen, it won’t happen anytime soon. Our point of illustrating this example is that a tariff can be a useful tool under the right circumstances. This doesn’t mean that multiple tariffs aimed at various countries are the ultimate solution, but it shows that some tariffs may not be automatically bad. A final thought here is that Germany could address the tariff issue by reducing the tariff it charges for U.S.-made goods. Again, that would make U.S. products more competitive in Germany and potentially reduce the trade deficit. We believe that would be an acceptable outcome for President Trump.
Global Outlook
Today’s topic for our global outlook is one we haven’t touched on in a while. The topic is Ukraine. The entire world is surprised and amazed that Ukraine, a country that wasn’t ever considered a regional military force, has been able to hold back the Russian onslaught that started in 2022. Russia was considered a global military force at one time, but that has now been taken down at least one notch to a regional military power. Even that is questionable as it does not appear Russia can win the war to the extent they intended.
Most military experts agree that Russia entered Ukraine in February 2022 with the intent of taking out their political leadership, overwhelming the capital, Kyiv, and taking over the entire country. Their expectation was likely to take the country within a month of the invasion, though we have no way to know that for sure. No matter, Russia has taken about 20% of Ukraine’s total land mass for its control, including Crimea. But the war is essentially stuck at this point, with Russia unable to make substantial further territory gains and Ukraine unable to push Russia backward. Thus, comes in President Donald Trump, who has claimed to want to end the war. He is trying to find a way to extend the cease-fire agreement between Ukraine and Russia. We know Russia has been making incremental territory gains and that they are in no hurry to agree to a cease-fire.
We also know Ukraine has had some successful counter operations, but they don’t have the manpower to retake territory. Long story short, we’ve had a couple of tentative cease-fire agreements that have mostly been upended by Russia deciding that they need more concessions than initially agreed. Mr. Putin seems interested in pushing for as much as he can get. Trump has expressed some frustration with Vladimir Putin, but how he will respond to him remains to be seen. Rumor has it that Donald Trump is willing to bend to some of Putin’s requests, but he also has threatened adding more sanctions against Russia if they fail to agree to a cease fire. We feel Trump could also decide to provide additional weaponry to Ukraine to punish Russia for its stubbornness, but he has never suggested anything of the sort. We think that if Ukraine could show some military offensive successes, Mr. Putin might be more willing to negotiate. Wishful thinking on our part?
Disclosure: Past Performance is no guarantee of future performance.
Reference Links
S&P 500
U.S. Tariffs
German Tariffs
German VAT
Trade Deficit
Atalanta Fed
U.S. Gross Domestic Product
War in Ukraine
