Q1 2025
Dear Client,
We generally prefer to write during peaceful moments when we can reflect on the quarter past and the upcoming years with an eye to economic growth rates and earnings multiples. Unfortunately, the current environment is dictating a different schedule, and we wanted to get this note out to you before the weekend.
As we write, S&P futures indicate a second consecutive day of significant losses in the markets. The selloff is a result of the tariff announcement made by the Trump administration on Wednesday. On days like yesterday and today, we are generally quite busy analyzing the news flow and picking off deals as they become attractive based on both fundamentals and price history. For many of you though, we know the market fluctuations, and especially the tremendous noise originating in DC and trumpeted on every news outlet, are scary and difficult to parse. As such, we wanted to get this note out ASAP and let you know we are very much paying attention, we are doing our best to adapt to the changing environment, and thus far, we are glad to see our allocations behaving mostly as expected. We have heard from many of you in the last couple of months, with concerns as well as messages of support. We cannot overstate how much we appreciate your support as we navigate this sort of market. Obviously, we are also here to support you and answer any questions you may have (to the extent that we can). On that note, please don’t hesitate to reach out for specific information about your portfolio, or further discussion of the situation. We are happy to chat with you about your portfolio and answer what we can about the larger situation.
As we are hurrying this note out to address the current volatility, we will change the usual order of looking at the past quarter’s returns first, and instead address the current situation and outlook first:
After a month of imposing, adjusting, and removing tariffs on our two neighbors and largest trade partners, Mexico and Canada, the Trump administration unveiled tariffs on every other country with whom we conduct trade. While the general idea that this was coming was known, the specifics were unknown and turned out to be potentially much worse than the market anticipated. The absolute levels of the tariffs as well as the seemingly haphazard calculation methods, and the mixed and contradictory messaging from the administration have all left the markets (and the rest of the world) deeply uncertain about how this will all play out. Nonetheless, as a business owner, investor, or (presumably) a trade partner, one must attempt to analyze all of this in order to make decisions on how to react.
Our general analysis is that if the tariffs are maintained as presented on Wednesday, there is a reasonable probability of a global recession. The markets selling off are the first manifestation of that analysis and conclusion. Financial markets are always looking ahead and working to discount future outcomes (sometimes they are correct, sometimes not). The real-world manifestations will be a bit slower to present, but will include rising unemployment, falling earnings, and probably inflation.
Given that analysis, and our further belief that the administration does not want that outcome, we believe that the tariffs will be negotiated down in almost all cases. If that does happen before too much damage is done, then the markets will likely begin to recover. We entered this period with a strong and growing economy. Although this administration tends to make proclamations and policy from moment to moment, and the markets tend to react immediately, the real economy moves much more slowly. While we all wait to see what comes to pass, the financial markets will be volatile and responding to each subsequent headline, but hopefully the economy will keep chugging along for a while.
And now for the regular look-back:
The index changes for the quarter were as follows (calculated from wsj.com/market-data):
S&P 500 change: -4.94% Q1
S&P 500 Equal Weight Index: -1.08% Q1
Nasdaq Composite change: -10.85% Q1
Nasdaq Composite Equal Weight Index: -3.75 Q1
Dow Jones Industrial Average change: -1.54% Q1
Ten Year Treasury Yield change: -6.08% Q1
Crude Oil (WTI Front Month Contract) change: -0.51% Q1
Gold (GLD ETF) change: 17.98% Q1
Two items stand out immediately: The underperformance of the Nasdaq (mainly large-cap tech companies), and the outperformance of Gold. Unfortunately, these two items are consistent with the fear and disruption that has manifested in the first few days of the new quarter. Similarly, the decline in the yield of 10-year treasury bonds shows a level of fear as investors buy bonds, driving the price up and the yield down.
For the time being, we will continue to look for opportunities amidst the carnage. We are also keeping in mind the possibility that things can always get a bit worse before they get better. For those of you drawing on your accounts, please keep us up to date on your anticipated needs. We have done our best to make sure sufficient cash is available to preclude the need to sell anything for a reasonable interval, but that equation can change based on market events as well as your needs.
We hope you all have a pleasant weekend! We plan to take a deep breath and spend some time outside. Monday will be here soon enough.
Best Regards, Bo and Lesley
