First Quarter Market Update 2025: Tariffs, Timing, and Total Returns
I love a good story or analogy as much as anyone, but with everything going on right now, I feel it's best to just get down to the brass tacks. For this market update, I’m just jumping right to the information. I want to share how markets are doing and that FSG is being proactive. I think many may be surprised to find out that their accounts are doing much better than anticipated given the news cycle.
As you can see below, US growth stocks are down significantly more than value stocks. This is something I’ve been writing and talking about for some time now. Growth/technology stocks were way overvalued coming into 2024, and that overvaluation got worse coming into 2025. When volatility rears its ugly head, overvalued assets/stocks will be the first to get crushed. Naturally, the more expensive an asset is, the riskier it is; therefore, it's no surprise that when volatility showed up in December, investors fled to value (perceived safety).
Source: YCharts
The magnificent seven stocks are an excellent representation of this “overvaluation effect.” As you can see, they have been hit quite hard this year relative to the market, but that's only after outperforming the market by over 20% over the past two years.
One fun thing that has happened over the past month or so is during meetings, clients have been shocked and delighted to find out that their accounts are only slightly down or in many cases, up so far this year. For example, as of March 31st, the FSG ETF Moderate model is up for the year.
FSG ETF Moderate YTD = .41% Gross
FSG ETF Moderate YTD = .16% Net
S&P 500 YTD= -4.27%
Nasdaq Composite Total Return YTD = -10.26%
Some of our more aggressive ETF/asset allocation models have fallen slightly year to date; however, the diversification factor of our strategies has certainly helped relative outperformance in recent months. The diversification elements that are carrying the outperformance are international stocks, emerging markets stocks, and bonds.
Source: YCharts
The outperformance of international markets may come as a surprise to many due to the implied impact of tariffs, but the outperformance aligns with the previous statement I made about overpriced markets. For years, the international stock market has traded at a much cheaper price-to-earnings ratio than the US market and, therefore, could be seen as safer. Additionally, Europe is beginning to realize it will need to depend less on the US for military support and as a result, they are starting to invest in their own militaries and economies.
In addition to seeing great relative performance of our asset allocation models, our large cap individual stock portfolio (owned by some FSG clients) has had an excellent start to the year.
(as of 3/31/2025)
FSG Dividend and Growth YTD = 3.10% Gross
FSG Dividend and Growth YTD = 2.87% Net
S&P 500 YTD= -4.27%
Of course, the individual stock strategy carries additional risks as it is far less diversified than an asset allocation strategy, which is why it is not right for every investor. Despite market headwinds, this strategy has performed well due in part to owning appropriately valued companies and ensuring a balance across stock sectors.
LET'S TALK TARIFFS
As I write this article on 4/3, the market is experiencing a very down day in response to President Trump’s Liberation Day tariff announcement. Although I’m not a huge fan of these very volatile periods, I’m not concerned about the medium to long-term impact of these tariffs. As we will see throughout the year this is a negotiation and is a ride we unfortunately need to stay on to participate in market upswings.
Lately, I have taken a number (less than a dozen) of phone calls and emails from FSG clients asking about markets and indicating they are nervous. Nearly everyone says the same thing: “I’m sure everyone else is nervous right now as well.”
That's always an interesting turning point in the conversation, as I state that the number of investors who are nervous right now seems to be pretty minimal. In my experience, political leanings can exacerbate emotions related to investing. If you have a sincere distaste for President Trump, the recent market volatility tends to cause more concern than warranted. I saw a similar reaction from conservative-leaning investors during the 2022 market downturn when President Biden was in office.
The point I’m trying to make here is to not let your political leanings create an illogical emotional response to the daily, weekly, and quarterly movements of the markets. Markets have grown for decades during good, bad, right, and left leaning Presidents. The global economy (and therefore stocks) endures through world wars, pandemics, and recessions. Sitting on the sidelines (aka market timing) because you don’t like the policies of a President would be a return killer for either side.
As I stated in my previous market update in January, the real macro driver of markets this year will be interest rates and inflation. President Trump’s tariffs will rattle or excite markets on a day-to-day basis, but ultimately, interest rate cuts will drive markets higher or lower by year-end.
If inflation subdues, the Fed will respond by cutting rates, which will push markets higher. If inflation does not subside, we could expect an economic slowdown, causing The Fed to cut rates as well. Either way, we see interest rate cuts in the near future which will drive markets higher. Of course, we cannot predict world events, which are typically the cause of major market events.
Ultimately, we have our portfolios positioned to protect the downside and participate in the upside. Each person has unique investment goals, so we ensure everyone is in a risk appropriate investment strategy. We are constantly monitoring markets and strategies for any necessary adjustments and will likely have some portfolio changes coming in the next few weeks.
Please let your advisor know if you have any questions or concerns.
Written by: Brice Carter
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