First Quarter 2025 Recap: Investment Commentary Summary

Market Recap

Global stock markets were widely mixed across regions and styles over the first quarter. After making a new all-time high in mid-February, U.S. stocks (S&P 500 Index) suffered their first 10% correction since 2023 with fears about Chinese AI firm DeepSeek, combined with increasing trade tensions, being the catalyst, before recovering to end the quarter down 5%. Smaller-cap U.S. stocks (Russell 2000 Index), which tend to be more volatile than their larger-cap counterparts, declined further, ending the quarter down 10%. Large-cap growth stocks (Russell 1000 Growth Index), which have led the market higher for several years, lagged this quarter as investors rotated into U.S. large-cap value (Russell 1000 Value) and foreign stocks (MSCI EAFE) amid economic uncertainty.

In contrast to the U.S., many European and Asian markets rose sharply. Developed International stocks (MSCI EAFE Index) gained nearly 7%, driven in large part by a fiscal policy shift in Germany focused on increased defense spending. Emerging market stocks (MSCI EM Index) also fared well, finishing the quarter up 3%. Gains in emerging markets were bolstered by China which delivered solid, double-digit returns of 15% (MSCI China Index).

Interest rates experienced significant volatility throughout the quarter, fluctuating amid shifting inflation expectations, Federal Reserve policy signals, and broader market uncertainty. Overall, the 10-year Treasury rate declined from 4.57% at the start of the year to end the quarter at 4.36%. The decline in rates benefited investment-grade bonds, which gained 3%. High-yield bonds (ICE BofA High Yield Index) also ended in positive territory gaining just under 1%.

Performance in the first quarter was a great reminder of the benefits of diversification. The downturn in U.S. stocks, growth stock in particular, were offset by gains in U.S. large cap value stocks, foreign stocks, and investment-grade bonds. But in many ways the bigger story is being written in the days following the end of the first quarter, with tariffs being the dominant driver.

Investment Outlook and Portfolio Positioning

April 2, President Trump surprised global investors by announcing a comprehensive set of much higher-than-expected tariffs (what he declared “Liberation Day”) that if implemented and maintained, would result in the effective tariff rate on all imports rising to 24%, putting it at a 125-year high.  Then one week later on April 9 President Trump announced a pause on some of the harshest tariffs, which sparked a rally that saw the S&P 500 Index rack up its biggest one-day gain since 2008.

The ever-changing tariff landscape has weighed heavily on sentiment adding to overall uncertainty. Prior to the pause announcement, the S&P 500 had dropped by over 18% from its February 19^th high. Following the tariff pause it recovered somewhat, and by April 11 was down just over 12% from February 19. The proposed policies signal a shift toward protectionism which if maintained, raise the risk of significantly slowing economic growth.

One of the key questions facing investors is whether tariffs will push the global economy into recession causing further declines in global stock markets. If left intact, we believe this is a likely outcome. According to the IMF and Ned Davis Research, a 10% universal tariff, coupled with retaliation abroad, would reduce global economic growth by 0.5%. This latest announcement puts tariffs at levels at least twice that (i.e., 24%), doubling the damage if not more so. The global economy’s one saving grace is that it was in good shape prior to the tariff announcement.

Meanwhile, the Fed finds itself in a challenging position amid the current tariff policy. While the “reciprocal” tariffs are a threat to growth, the likelihood of tariff-induced inflation complicates the Fed’s ability to respond aggressively with rate cuts that would further fuel inflation.

During periods of heightened volatility and fear, it is especially important not to allow short term headlines to drive investment decisions. Getting the two-part timing decision of when to sell and when to jump back in is a long-term losing proposition. Markets are not in full meltdown at this point, but at 10% correction levels we field more questions about selling now to side-step further losses. Ultimately, in periods of equity declines, we are biased to be buyers instead of sellers.

In portfolios we manage, our fixed-income exposure continues to favor our positions in shorter-dated bonds, primarily high-quality and earning yields above the benchmark. Uncertainty surrounding inflation, interest rates, and global economic conditions leads us to maintain a bird-in-hand approach, prioritizing attractive absolute returns over trying to predict the timing and magnitude of interest-rate moves.

Within the equity markets, the recent selloff has resulted in meaningful valuation compression for U.S. stocks as forward earnings estimates remain largely unchanged. U.S. stocks have gone from historically expensive to a more reasonable range in a matter of weeks. But they are not yet close to being at bargain prices based on valuations and sustained pressure from tariff and trade policy would be a negative. This brings us back to the benefits of diversification—which we use as a tool to augment returns and reduce volatility, where we maintain exposure to international equities and less expensive segments of the U.S market (such as value and non-mega-caps).

Closing Thoughts

Tariffs and trade policy have injected a big dose of uncertainty into the financial markets, and we understand that such developments can be worrying. There are still many lingering questions, including where the dust will settle with retaliatory measures, whether the announced tariff levels will remain in place or possibly be lowered, and what their ultimate impact will be on the financial markets. Absent more clarity, the volatile environment will likely continue.

While many foreign and U.S. economies were in decent shape prior to Trump’s tariff announcement, the odds of a recession are clearly higher. We are assessing this rapidly evolving situation and will weigh potential opportunities as they arise against the risks we see. We believe it’s critical to stay disciplined and avoid making reactive portfolio shifts. Though challenging, this is an environment that reinforces the importance of diversification, patience, and a clear investment process.

As always, we appreciate your trust.

The full commentary is available here: First Quarter 2025 Investment Commentary

The views and opinions expressed are current as of April 14, 2025, and may change without notice. This material is for informational purposes only and is not intended as investment advice, an offer, or a solicitation to buy or sell any security or adopt any investment strategy. Investing involves risk, including the potential loss of principal. Diversification does not ensure a profit or protect against loss in a declining market. Past performance is not indicative of future results. Forward-looking statements are not guarantees and involve risks, uncertainties, and assumptions that are difficult to predict.

Please consult your financial, legal, or tax advisor before making any investment decisions.

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Important Disclosure

This newsletter is limited to the dissemination of general information pertaining to Litman Gregory Wealth Management, LLC (LGWM”), including information about LGWM’s investment advisory services, investment philosophy, and general economic market conditions. This communication contains general information that is not suitable for everyone. The information should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be construed as legal or tax advice, and you should consult with a qualified attorney or tax professional before taking any action. The information presented here is subject to change without notice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.

LGWM is an SEC registered investment adviser with its principal place of business in the state of California. For information pertaining to the registration status of LGWM, please contact us at compliance@lgam.com or refer to the investment adviser public disclosure web site (www.adviserinfo.sec.gov). For additional information about LGWM, including fees and services, send for our disclosure brochure as set forth on Form ADV by contacting compliance@lgam.com.

Index Disclosure

Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

The Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Stocks in the Index are chosen for market size, liquidity, and industry group representation.

Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

Russell 2000 Index measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.

Russell 1000 Growth Index measures the performance of the large- cap growth segment of the Russell 3000 Index.  Russell 1000 Value Index measures the performance of the large- cap value segment of the Russell 3000 Index.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries* around the world, excluding the US and Canada. With 799 constituents, the index covers approximately 85% of the free float- adjusted market capitalization in each country.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.  The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.

The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 597 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float-adjusted market capitalization.

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.