Economy
Yesterday, Trump’s “Liberation Day” Press conference confirmed investors’ worst fears of an impending global trade war. Goldman Sachs estimates that the ‘reciprocal’ tariffs announced by the White House, coupled with other tariffs already announced year-to-date, would raise the US effective tariff rate by 18.8%. While it’s possible that the negotiations with trading partners will lead to somewhat lower ‘reciprocal’ rates than announced yesterday, the prospect for escalation following retaliatory tariffs suggests a risk that the US effective tariff rate rises more than the 15% increase that many Wall Street economists were forecasting. If the effective tariff rate indeed ends up rising to 15% or more, the negative impact on economic growth could be as high as 1 1/2 to 2%. Under this scenario, growth could potentially fall to 0% in the second half of 2025. All eyes are on the administration now and on negotiations with partners to see if some of the tariffs will be walked back.
March 2025 unfolded as a period of mixed economic signals for the US economy. While the labor market exhibited stability, maintaining an unemployment rate of 4.1%, underlying currents suggested a potential deceleration, evidenced by the Federal Reserve’s decision to revise its year-end unemployment forecast upwards to 4.4%. Inflationary pressures continue to weigh on investor sentiment, with core PCE inflation registering 2.6% in January and the Federal Reserve adjusting its 2025 projection up to 2.8%, a revision significantly influenced by the anticipated pass-through effects of recently implemented tariffs and retaliatory measures in international trade. The trade deficit continued to represent a notable drag on 1st quarter GDP, initially amplified by a surge in January gold imports and poised for continuing volatility driven by the evolving landscape of trade policy.
The Federal Reserve’s March FOMC meeting concluded with a unanimous decision to maintain the federal funds rate at 4.5%, accompanied by a further reduction in the pace of quantitative tightening. During his press conference, Chair Powell highlighted increased economic uncertainty due to tariff and fiscal policy, specifically noting that tariffs contributed to the upward revision in the Fed’s inflation forecast, potentially delaying the return to its 2% target until 2027. Despite downward growth and upward inflation revisions, the Fed signaled a continuation of its “data-driven” approach, citing the solid labor market and steady economic activity. And while the Fed still anticipates growth to be 1.7 % for 2025 as a whole, a growing consensus among private economists has significantly reduced first-quarter GDP growth forecasts, with some models even suggesting a contraction of around -.5%. This weak start has led to a broader downward revision of the full-year 2025 economic consensus, now clustering between 1% to 2%, down from forecasts of 2-3% at the start of the year. As a result, several financial institutions, including Moody’s Analytics, Goldman Sachs, and J.P. Morgan, have increased their recession odds, now ranging from 35% to 40%. The New York Fed’s recession model estimated the probability of a recession by February 2026 at 27.01%. These increased probabilities reflect economists’ more cautious economic outlook, driven by the recent softening in economic hard data.
Investment Commentary
Market Recap
U.S. markets experienced a turbulent first quarter as concerns about impending tariffs, inflation, and economic growth spooked investors. Although the S&P 500 achieved three all-time closing highs during the quarter, the index subsequently dipped briefly into correction territory in March. After a small rally on the final trading day, the S&P 500 closed out the quarter with a 4% decline, posting its worst quarterly loss since 2022. Mid and small-caps fared worse than their large-cap peers, falling by 6% and 9%, respectively. On the other hand, international stocks had their best performance versus US stocks since 2022. Almost all fixed-income categories recorded gains. 10-year Treasury yields fell as flight-to-safety trades gained in the latter part of March.
Navigating a Policy-Defined Market Regime
March presented a distinct inflection point for equity markets, shifting its focus from technical factors to the tangible implications of a new policy regime. While February saw pressure from high valuations and concentrated tech leadership, the dominant narrative in March became the economic consequences of the new administration’s agenda: increased tariffs, reduced immigration, and cutbacks in federal spending. These anticipated shifts have introduced significant economic uncertainty. Wall Street economists now believe these policies will exert a considerable drag on economic growth, leading to lowered economic forecasts, as mentioned above, alongside upward revisions to inflation expectations and a potential rise in unemployment. In light of the Trump “reciprocal” tariffs announced yesterday, the current environment necessitates a thoughtful investment posture focused on understanding the evolving macroeconomic realities.
Strategic Positioning in a Dynamic Environment
Trump’s tariff-driven economic policy directly impacts corporate profitability and, therefore, requires an adaptive approach to strategic asset allocation. The recent erosion of both consumer and business confidence underscores the potential for continued market volatility. Consequently, robust diversification across asset classes and within equity portfolios remains paramount. Within equities, we still advocate a focus on stocks with low debt, high margins, and resilient business models with lower sensitivity to economic fluctuations. In periods of economic deceleration, allocating to stable, high-quality companies offers better downside protection. While long-term potential remains in many technology stocks, a more discerning approach focusing on strong fundamentals globally is warranted. Navigating this landscape will require vigilant monitoring of policy developments and their impact on economic indicators and corporate earnings.
Wealth Planning
Roth IRA Conversions and Tax Loss Harvesting
With the S&P 500 off 10% from its high, it is time again for you to consider rolling over your IRA to a Roth IRA. The benefit of doing this now is that the taxes you will pay will be lower than if you had done this in the middle of February when the market was at a high. Additionally, the assets rolled over will be able to continue to grow tax-free and will come to you tax-free if you make a withdrawal in the future. There also will not be a required minimum distribution. You can continue to let the assets grow tax-free over the long term.
However, there are some rules: the assets must stay in the Roth IRA for at least five years after the rollover, and your income will increase in the year of the rollover. Therefore, it is important to work with us and your CPA to determine the right amount to roll over.
Tax Loss Harvesting: In this down market, you will notice that we are locking in losses where we can. For example, if you own an S&P 500 ETF that is losing money, we will sell it and buy another ETF, such as the Russell 1000 ETF. Locking in these losses allows us to reallocate within your portfolio without impacting capital gain taxes.
Please let us know if you have any questions or would like to discuss either of these topics.