Q1 2025 Market Recap

Dear Clients,

I hope you are doing well.  I wanted to give you an update on 1st quarter market recap, what the new tariff announcements mean for your investments and how we have positioned your portfolio in this time of extreme volatility, and also important financial planning changes for 2025.

First Quarter 2025 Market Recap:

Markets entered 2025 with continued pressure from late 2024, as uncertainty around Federal Reserve rate policy and renewed tariff threats weighed on sentiment.  However, solid economic data and dovish Fed commentary early in the quarter helped stocks rebound, pushing the S&P 500 to a new all-time high in February.  That optimism faded as trade tensions escalated—President Trump threatened and ultimately enacted 25% tariffs on Mexico, Canada, and China—sparking a wave of volatility and concerns about slowing economic growth.  Consumer confidence declined, corporate earnings guidance was lowered, and fears of a global trade war resurfaced, leading to a sharp March selloff and leaving the S&P 500 near year-to-date lows.  

While tech and consumer discretionary stocks dragged on index performance, more defensive sectors like energy, healthcare, and utilities held up much better.  Value stocks outperformed growth, and international markets, particularly developed economies had solid returns.  Bonds also saw modest gains as investors sought safety amid growing economic uncertainty.  As seen in the charts below, not all countries / asset categories were negative and reinforced our belief that having a balanced / diversified portfolio can help to offset market volatility in our markets.

Asset Class – Index: Source Morningstar	Quarterly Return
U.S. Large Cap Stocks – S&P 500	-4.3%
U.S. Mid Cap Stocks – S&P Mid Cap	-6.1%
U.S. Small Cap Stocks – Russell 2000	-9.5%
U.S. Bonds - Barclays U.S. Aggregate Bond Index	2.8%
Foreign Emerging Markets Stocks – MSCI EM	2.4%
Foreign Developed Countries Stocks – MSCI Europe Australia, Far East (EAFE)	6.9%
Broad Based Commodities – Bloomberg Commodity TR	8.9%

What New Tariff Announcements Mean for Your Investments:

The markets were surprised by the magnitude of tarffs and it is still to be determined whether this is negotiating tactic or a long-term policy tool.  The broad tariffs raise near-term growth, inflation, and recession risks.  The likely impact is a short inflation increase with a growth slowdown due to uncertainty of the impact.  The break-down of who will be impacted is likely both corporate supply chains and consumers.  There is a lot of confusion and worry from investors about this market, so now that we know the tariff plans, I want to provide three likely scenarios and the factors we are watching:

Good: growth will slow but stays positive and potentially re-accelerates later in the year with tax relief and deregulation

• Tariffs

  • Rest of world tariffs are at or below 10%.

  • China tariffs dramatically reduced.

• Growth

  • ISM Manufacturing and services PMIs do not drop below 50 for more than two consecutive months, signaling economic growth.

  • Unemployment rate does not rise above 4.4%.

  • The four-week moving average of jobless claims does not rise above 275k.

  • Retail sales do not materially drop (say greater than 5% from recent highs).

Bad: uncertainty with on-again / off-again tariff news will weigh on growth and it will essentially stall, leaving markets in holding market and on the edge of recession

• Tariffs

  • Rest of world tariffs are above 10% but not greater than April 2 levels.

  • China tariffs are only modestly reduced.

• Growth

  • ISM Manufacturing and services PMIs drops below 50 but remains above 47, signaling moderate economic decline.

  • Unemployment rate rises to and above 4.3% but remains below 4.5%

  • The four-week moving average of jobless claims rises above 250k but less than 275k.

  • Retail sales solidly drop (reach multi-month lows).

Ugly: This scenario essentially reverts us back to where we thought we were on Tuesday before the President Trump paused tariffs.  It puts stagflation squarely back on the table and makes the S&P valued above 5,000 very difficult to justify.

• Tariffs

  • Rest of world tariffs revert to April 2nd levels.

  • China tariffs are fractionally reduced or not reduced at all.

• Growth

  • ISM Manufacturing and services PMIs drops below 50 for 3 months in a row and decline below 47.

  • Unemployment rate rises to and above 4.5% and continues climbing towards 5.0%

  • The four-week moving average of jobless claims rises above 275k.

  • Retail sales solidly drop (reach multi-month lows).

Uncertainty has led to a deceleration of economic activity and may increase the odds of an economic recession over time.  While a recession is not a given, we think that the market will remain volatile as tariffs are the prevalent topic for businesses and the markets.  Many of the major investment firms have decreased their projections for 2025 U.S. stock market returns (S&P 500) as seen below:

Wall Street Firm	2025 S&P 500 Forecast (1.1.2025)	2025 S&P 500 Forecast (Revised)	Revision % Change	Predicted 2025 Calendar Year Return	Predicted Return from 4.17
Oppenheimer	7,100	5,950	-16%	1%	13%
BMO Capital	6,700	6,100	-9%	4%	15%
JPMorgan	6,500	5,200	-20%	-12%	-2%
Evercore	6,800	5,600	-18%	-5%	6%
RBC Capital	6,600	5,550	-16%	-6%	5%
Goldman Sachs	6,500	5,700	-12%	-3%	8%
Bank of America	6,666	5,600	-16%	-5%	6%
UBS	6,600	5,800	-12%	-1%	10%
Average Forecast:	6,683	5,688	-15%	-3%	8%

While clearly markets are facing legitimate headwinds, it is important to realize that stocks have fallen mostly on fears of what might happen in the economy, not because of what is actually occurring. Point being, if future policy decisions and an economic slowdown aren’t as bad as currently feared, it could cause a substantial market rebound in the coming months.  As seen in the chart below, investor sentiment is at 3-year low and historically when sentiment bottoms the average annual return of the S&P over the next 12 months is 24.1%.

 The bond market has historically been a very good predicator of a market slowdown and the two primary bond indicators we watch closely:

·       10 Year U.S. Treasury Yield, if we see this above 5.0% for an extended period it could indicate  foreign countries reducing confidence in the U.S. as a safe haven and rising inflation expectations.

·       High yield corporate bond yields widen also above 5%, that would indicate increased risk of default and economic slowdown / recession.

As seen in the chart below, both indicators spiked last week on the tariff announcements and have moderated some but credit spreads are still at elevated levels that need to be watched closely.

Investment Strategy Going Forward:

• Diversified portfolio tailored to your specific financial goals and risk profile.

• Invest in high-quality investments with favorable risk to return profiles (positive alpha).

• Strategic and disciplined rebalancing to help reduce risk when appropriate.

We have increased the use of buffered notes / hedged equity ETF’s, which offer a level of downside protection and a predetermined cap on upside returns. These structured investments can help smooth out performance in choppy markets by absorbing a portion of losses when equity markets decline.

We have also incorporated alternative investments in mutual funds. These include private equity, private credit, real estate, hard assets like gold, and hedging option strategies that have historically had low correlations to the stock market.  This adds another layer of diversification to help reduce overall portfolio volatility.

The recent market volatility has reinforced our investment strategy to resist the urge to react to every headline and stay invested.  The chart below shows the benefits of not selling during historic declines:

						Annualized (%)
Date	Cause	One-Day Decline %	# Days to Reach Previous High	Return After 1 Month	Return After 1 Year	Return After 3 Years
10/19/1987	Black Monday	-20.47%	264	9.3%	23.2%	11.6%
10/26/1987	Black Monday 2.0	-8.28%	5	7.2%	23.6%	10.2%
10/27/1997	Asian Financial Crisis	-6.87%	8	8.5%	21.5%	16.3%
9/29/2008	Global Financial Crisis	-8.79%	410	-15.9%	-4.1%	1.6%
10/9/2008	Global Financial Crisis	-7.62%	3	1.0%	17.8%	8.3%
10/15/2008	Global Financial Crisis	-9.03%	15	-6.3%	20.8%	10.5%
12/1/2008	Global Financial Crisis	-8.93%	6	14.2%	35.9%	15.1%
3/9/2020	COVID-19	-7.60%	37	1.6%	41.1%	12.6%
3/12/2020	COVID-19	-9.51%	20	11.3%	59.0%	15.9%
3/16/2020	COVID-19	-11.98%	19	17.3%	66.1%	18.4%

The key takeaway: even when the market experiences a sharp drop, it has historically rebounded. Overreacting to volatility and exiting the market during these moments often means missing the recovery and makes the inevitable market storms more manageable.

We have experienced this type of market volatility before and we are here to help make sense of the headlines and ensure your financial plan stays aligned with your goals—regardless of what the markets may bring.  We continue to monitor developments and remain committed to helping you navigate this complex environment. 

If you have any questions or concerns, please do not hesitate to reach out to us. 

Below are some important Financial Planning Figures in 2025:

• 401(k) Maximum Contributions (not including employer match):

• Under age 50: increased $500 to $23,500

• Age 50 to 59: $31,000

• Ages 60–63: new “super-catch-up” contribution $34,750

• IRA & Roth IRA Maximum Contributions: no change from last year

• Under age 50: $7,000

• Age 50 and above: $8,000

• Health Savings Accounts (HSAs): self-only $4,300 and $8,550

• Age 55 and above: $1,000 catch-up contribution

• Required Minimum Distribution Age: no change from last year

• Age 73 for those born from 1951 through 1959

• Age 75 for those born in 1960 or later

• Gifting Tax Exclusion: increased $500 to $19,000 per recipient

• 529 Plan Rollovers to Roth IRA: Plans open for at least 15 years can be rolled into a Roth IRA

• Under age 50: $7,000

• Age 50 and above: $8,000

• Social Security Cost-of-Living Adjustment: 2.5%

Sincerely,

Greg

Greg Clinton, CFA

President

Kraematon Investment Advisors, Inc.