A Note About “Liberation Day” Selloff
This post is supposed to be a review of the first quarter 2025 which follows below. However, we want to address the market’s reaction to President Trump’s “Liberation Day” announcement. At 12:30 pm Eastern Time on April 3, 2025, the S&P 500 was down 3.6%, with small-cap stocks declining 5.4%, oil down 7.3%, and the dollar weakening against major currencies. Bonds, considered a safe haven, rose by 0.6%. (See the table below for specific asset reactions.)
The announced tariffs exceeded market expectations, leading to a reassessment of economic forecasts, the job market, and corporate earnings. While the administration believes these tariffs will benefit the U.S. in the long term, the short-term impact is likely to include higher inflation, labor market challenges, and shifts in global trade patterns.
Today’s significant declines are unsettling, but it is important to maintain perspective and stay the course with your long-term financial plan. Market reactions to major policy announcements can be sharp, but they don’t always indicate lasting trends. Companies, governments, and consumers will adapt over time. We also would like to remind you that your portfolios are diversified and consist of more than U.S. stocks; for example, a global 60/40 portfolio is down 1.5% today which is quite painful but less than half of the S&P’s 3.6% drop.
Please reach out to us if you would like to discuss your portfolio and the best course of action going forward.
Q1 Markets and Events
The S&P 500 index declined 4.6% in the first quarter of 2025. The first half of the quarter was positive with the index rising 4.5% by February 19th. However, things quickly turned negative with the market selling off 10.1% to reach its low for the quarter on March 12th. With all the negativity out there, it sure feels much worse than a negative 5% return or even the 10% drop from top to bottom (which qualifies as a correction).
U.S. politics dominated the news cycle in Q1. President Trump was inaugurated on January 20th, which was followed by a flurry of executive actions. Cabinet nominations were next with several controversial nominees eventually approved. There was a whole slew of separate tariff announcements culminating in “Liberation Day” mentioned above. DOGE was another controversial focus with multitude to layoffs, funding cuts and other draconian actions. Then we had a contentious White House meeting with Ukraine’s Zelensky getting unkind reception by Trump and Vance. We closed the quarter with the fiasco of “small group chat” on Signal where defense officials discussed Yemen strike as a journalist inadvertently read on. There were many developments on the international stage as well with spurning allies, negotiating peace deals and promises to “take over” various countries.
On the corporate news front, there was a lot of activity in the AI space. In January, China’s DeepSeek sent seismic waves through the American AI space with it’s competitive but very cost-effective model. This would play out over the next few months as former momentum stock darlings were re-rated downwards (more on this rotation below). Tesla was another basket case with vehicle deliveries falling dramatically as Elon’s politics alienated the company’s core liberal constituency.
Economic indicators remained reasonably positive, with cooling inflation and a relatively strong labor market. The Federal Reserve maintained interest rates at its January and March meetings to manage inflation.
Asset Classes
Gold was a huge winner in the first quarter driven by safe haven demand as well as repatriation of physical gold from overseas to avoid potential tariffs. International stocks had a great quarter outperforming their U.S. counterparts by the largest margin since 1988. In fact, this is the first time in many years that we have clients asking us if we should have more foreign (the answer is we have enough exposure to be diversified). Bonds did their job a counterweight to stocks’ weakness in Q1. U.S. stocks of all types were weak as was Bitcoin.
Sectors and Stocks
On the industry/sector side, gold miners were up hugely, which makes sense given the metal’s rise. The same goes for energy stocks driven by strong oil. More generally, defensive sectors led by healthcare, utilities and consumer staples did well while many former leaders in growth sectors declined significantly. This is textbook market rotation where money comes out of recent winners and moves to more boring and defensive areas. While it’s normal, it does signal reduced risk appetite among investors which is a warning sign for near term market strength.
Digging a little deeper, Exhibit 3 shows the best and worst performing stocks in the S&P 500 during the first quarter of 2025. The left section features top/bottom 5 names by dollar change in market value (and thus largest actual impact on the cap-weighted S&P 500 index). On the negative side, recent darlings (and five of the Magnificent 7) had a tough slog losing 350 to 650 billion in market value each for a total of $2.3 trillion! In fact, these 5 stocks accounted for 93% of the market decline in the last three months. These sorts of numbers are exceedingly difficult to offset by relatively smaller companies on the top of the table. Try it as they may, these five companies only added $400 billion to the index value unable to dent the giants’ declines. About 45% of the S&P 500 stocks were positive in the quarter and the index would have gone up slightly if we excluded Magnificent 7 stocks (which of course we can’t).
The right section normalizes for the sheer company size and shows best/worst performers by percentage change in market value (as opposed to dollar change). On the positive side, we have a drug store, a tobacco company, a gold miner, a phone company, and a utility – who is who of defensive stocks. On the bottom we have consumer and technology companies, also confirming the rotation.
International Markets
As mentioned before, foreign stocks outperformed massively so let’s review the markets by country (Exhibit 4). European countries dominate top of that table as the continent wakes up to the new reality of having to pull more weight. Latin America is doing well also. U.S. is quite near the bottom with only a few countries (mostly in Asia) doing worse.
A Word on Diversification
As U.S. stocks are having a tough period, we wanted to remind clients why we diversify your portfolios. Diversification is a cornerstone of portfolio management, designed to reduce risk and enhance stability by spreading investments across different asset classes and regions. The first quarter of 2025 serves as an excellent example of its importance, as market dynamics highlighted the benefits of holding a diversified portfolio. The table below shows the results for three major pieces of our portfolio as well the combined 60/40 allocation. Despite the domestic stocks’ nearly 5% decline, the diversified portfolio was up slightly helped by foreign stocks and bonds.
