The Economy
Economic data in April continued to take a backseat to government policy. The second Trump administration’s agenda of increasing tariffs, restructuring the federal government through DOGE, and tightening immigration led to the most volatile market since the early days of COVID. Tariffs could eventually lead to higher prices for everyday items, and tighter immigration might affect the availability of workers, potentially slowing down the pace at which the economy can expand. When we see the prospect of slower growth coupled with rising inflation, it creates a less favorable environment for stocks and adds complexity to the bond market. As a result of this uncertainty, the stock market experienced a significant bout of volatility in the middle of April. To put it in perspective, the level of volatility was the most pronounced we’ve seen since the early stages of the pandemic. While things did settle down somewhat towards the end of the month, volatility is still about 50% above normal. The bond market also saw considerable movement, reflecting this unclear economic picture and concerns about international investors potentially selling their holdings of U.S. assets. All of this has market observers and economists carefully considering whether businesses might become more cautious about investing, and if consumers might become more hesitant to spend in the second half of the year. This could, in turn, put further pressure on U.S. economic activity.
We saw this interplay between government policy and the economy quite clearly this week when a batch of economic data was released. The weak first quarter GDP report clearly showed that businesses accelerated their purchases of goods from overseas in March to get ahead of the higher costs from the tariffs. While the economy as a whole contracted slightly in the first three months of the year, the underlying details paint a more nuanced picture. We saw a significant increase in the trade deficit, likely due to this pre-tariff buying spree. This actually dragged down overall growth, even as consumer spending continued at a moderate pace, although not as robustly as in the fourth quarter. Adding to this, prices of some core goods rose a bit more than expected. So, the first quarter presented a combination of slower growth and somewhat elevated inflation, an unfavorable mix for the markets. However, there was some encouraging news in the March data. Consumer spending picked up, and the underlying inflation figures were quite muted. This could give the Federal Reserve more flexibility to consider lowering interest rates if the economy shows signs of weakening in the months ahead. The key question is whether the economy can navigate these tariff-related uncertainties and avoid a recession. Several factors offer potential for optimism, including the possibility of interest rate cuts by the Fed, the chance that the peak of tariff concerns is behind us, and the potential for government initiatives to stimulate the economy later this year.
The Markets
April presented a tale of two distinct phases for the markets. The initial weeks were marked by increased volatility in U.S. stocks, largely reacting to Washington’s ongoing announcements about tariffs. However, the latter part of the month saw a significant rebound, with markets rallying as geopolitical tensions eased and corporate earnings reports, on average, weren’t as negative as some had anticipated. Despite a small gain on the last trading day, the main U.S. stock market index still finished April with a slight decline, its third consecutive month of losses. Smaller and mid-sized companies, which tend to be more focused on the U.S. economy, didn’t perform as well as larger corporations, declining between 2% and 4%. Furthermore, investors shifted out of traditionally more defensive sectors and back into the major technology stocks, partially reversing a trend we saw earlier in the year. Interestingly, international markets in developed regions like Japan and Europe outperformed the U.S., gaining 4%, supported by solid company earnings and a weakening U.S. dollar.
As we move into May, the initial shockwave from the tariff announcements appears to be subsiding. So far, we haven’t heard widespread concerns from companies about a significant negative impact on their profitability due to the tariffs. For instance, a major player like Visa reported continued strong growth in its U.S. business. It’s possible that the most intense period of uncertainty surrounding the new middle policies might have already passed. Historically, market bottoms often coincide with the point when economic uncertainty is at its peak. However, even if the initial “tariff shock” is behind us, we still need to be mindful of a potential recession. We are closely monitoring developments such as any adjustments to tariffs, employment data, and unemployment claims. The recent news about tariff relief for auto manufacturers offers a glimpse of potential policy adjustments, and the latest jobs data, while backward-looking, doesn’t currently suggest an imminent recession. For now, things appear relatively stable, but we remain vigilant and focused on the evolving landscape.
Wealth Planning
This weekend, shareholders of Berkshire Hathaway gathered in Omaha, Nebraska, to hear what Warren Buffett had to say about global trade and the surprise passing of the baton at Berkshire Hathaway to Greg Abel.
Warren Buffett’s investment philosophy has been about investing in great companies and holding them for the long term. Implicit in holding investments for the long term is also the need to be patient. Investing is not a straight line up. There are many valleys to traverse along the way. The following quote attributed to Buffett best underscores these attributes but also much more: “Someone is sitting in the shade today because someone planted a tree a long time ago.”
The central metaphor of this quote is “planted a tree a long time ago.” Planting a tree symbolizes making an investment in yourself, preparing a financial/estate plan, implementing this plan, and making decisions that require effort and time upfront, but lead to substantial benefits and growth over the long term. In this context, “a long time ago” signifies the time horizon over which the action was taken.
Focusing on the long term is also why financial planning is important. With planning, the actions taken today may not yield immediate results. The seeds we plant today for retirement come to fruition when we can sit “in the shade today”.
This quote encourages all of us to think beyond instant gratification and focus on decisions that might not pay off right away but will have substantial positive effects over time. For example, the current market volatility can make us question whether we can stay invested for the long term. However, having patience to wait for the shade from the tree will lead to dividends years from now.
Here is what we want you to remember:
- Stick with your financial plan and if something changes for you, this plan can be adjusted.
- Be patient
- Focus on the long-term goals