The Cost of Uncertainty

April 9, 2025 – The early weeks of the first quarter saw the S&P 500 gain 4.5%, setting new all-time highs. Then, beginning in late February, concerns of a slowing economy and looming tariffs started to weigh on stocks. In early March, responding to the tariffs on Mexico and Canda, the market decline accelerated. Then came the unexpected magnitude of the tariffs announced on April 2^nd that sent the S&P 500 falling more than 10%.

Now more than ever, uncertainty is the primary obstacle for the financial markets. The chaotic messaging around the rollout and the scale of the tariffs has resulted in maximum uncertainty around the world and in U.S. financial markets. This uncertainty freezes decision making for business and consumers to the detriment of the economy. Market participants cannot complete an analysis or make estimates for investment with trade policies subject to daily change. Uncertainty is increased by unclear objectives. The justifications for tariffs coming from the administration are many, varied and, to some extent, contradictory. Those have included increased revenues for the federal government, correcting trade imbalances, protecting industries of national security interest, and stopping illegal drug trafficking. Some are worthy objectives, but investors are left to question how to define success and gauge progress toward these objectives.

Trade is geopolitical and is also a relational process involving more than economic factors. America’s influence and access to regions around the world for military and other purposes are often tied to trade. Economic and reputational damage to America has already begun. The duration of tariff ambiguity will determine the extent of the damage to the markets. If results—however those are defined—come in days or weeks, the recovery will likely be swift. If the turmoil is allowed to continue for months, the economic and political pressure will build and likely cause a political or market event that forces a resolution that is beyond the president’s control.

In managing client portfolios through many types of markets, we remain high conviction strategic asset allocators. We build portfolios designed to reach the investor’s goals over time and, if needed, provide income along the way. A balanced, diversified portfolio has performed well this year so far. Conversely, attempting to be reactive, especially around fickle policy, significantly increases portfolio risk and is a recipe for serious damage to long-term objectives. This is not a naturally occurring economic or market development that has to be worked through; this event is an intentional creation and can be changed at any moment. It would be impossible to time moves that attempt to outguess ever-evolving policy changes.

Asset Class Outlook

U.S. Stocks
Prices for stocks have factored in significant bad news and still valuations are not cheap by historical standards. The duration of uncertainty will determine if the declines to date are sufficient. Earnings estimates are being cut by analysts, and we expect forward guidance by corporate executives due in the coming weeks will be muted or pulled all together due to uncertainty. We are hopeful the declines are nearly complete.

Foreign Stocks
Returns for foreign stocks were positive in the first quarter, significantly outperforming U.S stocks. In this environment, asset class diversification has paid off with foreign stocks and bonds positive for the first quarter. We will continue to hold an allocation to foreign stocks knowing that the path of currencies will have a significant effect on U.S. investment returns of those shares.

Fixed Income
Interest rates and credit quality determine bond returns. For now, credit is stable. The April 2^nd tariff announcement initially saw market rates decline (prices increase) for intermediate and long-term bonds. Now, over a week later, rates are instead reacting to the opposing forces of a possible recession (lower rates) and inflation expectations (higher rates). The Federal Reserve’s monetary policy influences short-term rates and for now the Fed is on hold and the spread between the 2-Year Treasury and the 10-Year Treasury is widening. We continue to capitalize on opportunities to invest in intermediate-term bonds at higher yields, holding them to maturity. Our preference remains high-quality bonds, and we manage interest rate risk by laddering portfolios across maturities of two to seven years.

For taxable accounts, we invest in tax-exempt municipal bonds. In tax-advantaged retirement accounts, we focus on taxable securities such as CDs, Treasuries, government agency bonds, and corporate bonds. For short-term objectives, we use money market funds and Treasury Bills, which currently yield over 4%, though reinvestment risk exists if short-term rates decline further.

While we review many areas of the market, our priority is always your personal goals and creating an individualized strategy to reach those goals. As always, we welcome you to call or visit our office any time.