The stock market reached a record high closing price on February 19, fueled by strong corporate earnings, a steady economy, expectations of lower interest rates, and optimism over business-friendly policies from the new administration. Unfortunately, the narrative shifted dramatically for the rest of the quarter. At the center of the negativity storm was President Trump’s threats to impose tariffs on our trading partners, which led to a surge in expectations for inflation and a historic decline in consumer confidence. Additionally, Fed Chair Jerome Powell suggested that rate cuts were on hold until the impact of the proposed tariffs could be better analyzed.
The biggest losers were the previously high-flying mega cap growth companies and the more economically sensitive consumer discretionary and small cap sectors. The winners were the Energy, Utility, Health Care, and Financial sectors, all of which generally viewed as “Value” holdings with lower Price/Earnings multiples and higher dividend yields. In fact, the iShares S&P 500 Value ETF (IVE) finished the quarter slightly in the green while the iShares S&P 500 Growth” ETF (IVW) lost 8.46%. Overall, the S&P 500 declined 4.3%. the Nasdaq Composite lost 10.3%. and the Russell 2000 dropped 9.5%.
In sharp contrast to the equity market, the fixed income market was very stable. In the previous quarter, the yield on the 10-year Treasury had moved 77 basis points higher to 4.57%, reaching its highest level in over 15 years. During the first two weeks of 2025 that trend continued, with the 10-year yield reaching 4.8%. A slow and steady decline over the rest of the quarter took that rate down to 4.25%.
Gold was the asset that glittered throughout the quarter, with the price per ounce setting a series of record highs, gaining almost 20%. Some of that rise can be attributed to the dollar weakness, but most of it was a response to the uncertainties surrounding the tariff threats.
The outlook for the economy softened significantly during the quarter, with GDP growth estimates slashed, and the odds of a recession rising. Those downward revisions are largely based on the impact of Trump’s “Liberation Day” Tariffs. We think there is too much uncertainty to make any dramatic shifts in stock market exposure, and caution that whipsaw could result from trying to trade the news flow. Instead, we advise investors to stick to their long-term investment guidelines.
The Federal Reserve will remain an important actor in 2025, hopefully providing easier monetary policy to help the economy in a measured fashion that doesn’t generate additional inflationary pressures. We believe that the existing conditions will further the shift into the “Value” shares of more resilient and dividend paying companies.