First Quarter 2025 - Economic Update

The following Newsletter is a recap of the first three months of 2025.  Since the writing of the newsletter, a lot has happened and market volatility has intensified! While more changes will probably occur, we can expect continued short-term uncertainty in the investment markets.   

We firmly believe that investing is a long-term endeavor, and that is why it is essential to maintain a diversified portfolio that aligns with your time horizon, risk tolerance, and investing behavior. Short-term volatility will come and go, but it should not distract you from your long-term plans. Regardless of whether stock prices are rising or falling, it is essential for investors to stay focused and prioritize their personal objectives. Please remember, happenings like tariffs, inflation, and tax law changes are beyond our control. What we can control is how we respond to them.  

As your wealth manager, we are here for you. We remain committed to staying informed on market conditions, tax law changes, inflation, interest rates, and any other matters as well as how they may impact your overall investment strategy. If needed, we are available to review your financial plan to ensure you are still on the right track toward your goals. 

We truly value and appreciate the trust you have placed with us. Please contact us with any questions or concerns you may have.  

Best regards, 

Ira Materetsky, CFP® and the entire Materetsky Team

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Most analysts did not anticipate the volatility that investors would face in the first quarter of 2025. The equity markets started the quarter with strong momentum, buoyed by President Trump's return to leadership of the world's largest economy and financial markets. After achieving impressive annual returns of over 20% in both 2023 and 2024, the equity markets reached another all-time high in February. Experienced investors knew that a market retreat could happen at some point during the year, as it is historically common for a pullback or correction to follow such positive performance. In the latter half of the first quarter, uncertainty took center stage in the headlines, leading to a swift and widely reported market decline.

The new administration came in as it indicated it would, and President Trump’s first agenda was to make quick and sweeping change. The transitional time between new administrations typically brings some uncertainty and thus volatility, so it has been hard to predict the reaction to the aggressive agenda of this administration. Some investors have become wary of the new administration’s agenda, and concerns over global trade wars and the tariffs have added to that uncertainty.

A correction is defined as a decline of more than 10% from a recent closing high. On March 13, the S&P 500 fell 10% from its new high set just three weeks prior due to easing inflationary pressure and positive earnings. The Dow Jones Industrial Average (DJIA) started its path toward correction territory but remained just above a 10% decline. Additional factors contributing to these declines included government employee layoffs, the possibility of a government shutdown, and concerns about an uptick in inflation. (Source: Investopedia.com; 3/13/25)

The S&P 500 and DJIA entered the first quarter with positive momentum, after reaching all-time highs in December 2024. The “Magnificent Seven” composed of Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla were the driving force behind the U.S. stock market’s strength in the past two years. As a group, they accounted for more than 50% of the S&P 500’s return in both 2023 and 2024. That leadership continued through early February, however, after a rough March, as a group, these tech stocks experienced their worst month and quarter on record. By March’s end, the S&P 500 registered its most difficult quarter since the second quarter of 2022. The S&P 500 closed the first quarter of 2025 down 4.6%, and the DJIA closed the quarter down 1.3%. (Sources: CNBC.com; 3/31/2025, First Trust 1/8/2025)

As financial professionals, we are committed to keeping our clients aware of any changes that could directly affect their situation. We strive to consistently review our clients’ investments and confirm they align with their time horizon, risk tolerance, and goals.

Tariffs

Tariffs have become a nightly news agenda item and widely discussed topic, and there are sizable concerns about their potential impact on the U.S. economy. The Trump administration is actively implementing several tariffs to protect domestic industries and boost sales of American-made products by taxing imports from countries like China, Canada, and Mexico. The White House has suggested that their tariffs will grow the American economy, help reduce our deficit and create jobs, but as of this report’s writing, it had not issued complete guidance or specifics including how long they will be in place. As of the quarter’s end, it remained uncertain how much these tariffs will affect the economy and inflation moving forward.

Change nearly always brings uncertainty, and we remain committed to keeping a watchful eye on these tariffs and their effects on our clients’ investment portfolios.

Inflation & Interest Rates

Key Points:  

•  Interest rates remained unchanged at 4.25 – 4.50% during the first quarter of 2025. 

• The Fed is still forecasting rate cuts in 2025.

• U.S. inflation decreased in February to 2.80%.

In the first quarter of 2025, the Federal Open Market Committee (FOMC) decided to maintain interest rates in the range of 4.25% to 4.50%. The Federal Reserve indicated that rate cuts are still possible this year, depending on whether inflation continues to decrease and the job market remains robust. With two FOMC meetings scheduled for the second quarter and another four more planned for the remainder of the year, the Fed remains committed to making further rate cuts contingent upon inflation trends and economic conditions.

Good news emerged with lower-than-expected inflation numbers reported, showing that U.S. inflation decreased to 2.80% in February, down from 3% in January 2025. Nonetheless, inflation pressures remain a concern in the coming months as we see how tariffs affect the economy and spending. (Source: cnbc.com; 3/12/25)

In February, the Consumer Price Index (CPI) for both core and all-items increased 0.2%. On a year-by-year basis, inflation was 2.8%, and core inflation was 3.1%. The core CPI, which excludes food and energy prices, is often viewed by economists as a better gauge of future inflation. The increase in shelter costs in February accounted for nearly 50% of the overall CPI rise. (Source: cnbc.com; 3/12/25)

Interest and inflation rate movements are integral for investors' financial planning indicators, and we will continue to monitor these key economic issues closely.

The Bond Market and Treasury Yields

Key Points:  

• The outlook for bonds in 2025 remains unclear. Interest rates, inflation trends, and clarity on tariffs are all contributing to higher yields; however, they remain sensitive to ongoing uncertainties. 

• Current bond yields could present an appealing option for investors seeking more stability against market volatility.

Multiple factors are keeping U.S. Treasury yields higher, including economic uncertainty and a reluctant inflation rate, and unchanged Fed interest rates. On March 31, the benchmark  10-year yields reached 4.23% and 30-year yields hit 4.59%. The shorter-term 2-year and 5-year yields were 3.89% and 3.96% respectively. (Source: U.S. Department of Treasury)

Diversification is an important strategy for a well-balanced portfolio, and bonds can be a good defense play against market volatility. Bonds can offer stability and a steady interest income during times of market decline. We consider using them for clients based on each client’s unique situation. Please remember that while diversification in your portfolio can help you pursue your goals, it does not ensure a profit or guarantee against loss.

Investor's Outlook

Key Points:  

• More changes are likely to come, and volatility is likely to remain during this transitionary period.

• Proactive planning with a well-diversified portfolio that takes into consideration your risk tolerance and time horizon is advised.

Investing is a long-term activity, and short-term fluctuations should not sidetrack you from your long-term goals. Working with a qualified financial professional can help you understand market conditions and if and how they may affect your overall strategy. 

While no one can predict the future, strategists have been adjusting their year-end forecasts, but almost all of them are still predicting higher levels by year end. “We’ve revised our year-end S&P 500 target to 6,400, down from 6,600, reflecting the anticipated impact of tariffs on earnings growth. Despite this adjustment, we still foresee meaningful upside driven by positive US growth and robust AI demand,” UBS stated.

“While we do expect ongoing uncertainty and volatility in the near term, our base case is that tariffs will not derail the economy. We expect the US economy to grow close to its 2% trend this year,” UBS added. (Source: seekingalpha.com; 3/31/2025)

Uncertainty is dominating the headlines and investors will continue to seek clarity about many things in the coming months. Change usually comes with some volatility. How investors and savers navigate this volatility and uncertainty is vital for the direction of their financial goals. One of the most important things to remember is that investing is a long-term activity.

What you can control is how you react. Three things you can control are: your behavior, your risk tolerance or appetite, and your time horizon. If you have a firm grasp of each of these, you should be able to maintain discipline and remain calm when volatility and market fluctuations arise.

So, what should investors do? 

Remember, the past two years have been exceptional for the U.S. stock market. Seasoned investors know this cannot always be the case and that at some point a market correction would be inevitable. 

Corrections are unpleasant, but they are a part of the investing experience. As a reminder, the term “correction” is used to describe downturns of 10% to 20%, because historically, the market drop often "corrects" and returns equity prices to their longer-term trend. 

Regardless of whether equities are rising or falling, investors should always put their primary focus on their own personal objectives. If you need to, we can revisit your financial plan to make sure you are still situated on the best path toward your goals. Equities should be viewed primarily as long-term investments, and a well-crafted plan incorporates the fact that they do not move in a straight line. As always, you should stay informed about the news but minimize your exposure to avoid getting caught up in speculative claims, unfounded predictions and fearmongering. 

2025 will continue to be a year of change. We welcome the opportunity to help you pursue your financial goals. Our team is willing to assist you with every step of your journey toward your financial goals. Please feel comfortable to schedule an appointment with us. 

Disclosure:

Advisory Services offered through Materetsky Financial Group Inc., a Registered Investment Advisor. Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. Private Client Services and Materetsky Financial Group Inc. are unaffiliated entities. All insurance products are offered through unaffiliated insurance companies. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Materetsky Financial Group, Inc. [“Materetsky]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Materetsky. Materetsky is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Materetsky’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.materetsky.com. Please Remember: If you are a Materetsky client, please contact Materetsky, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Note: The views stated in this letter are not necessarily the opinion of broker/dealer, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is general considered representative of the U.S. Stock market. The modern design of the S&P 500 stock index was first launched in 1957. Performance prior to 1957 incorporates the performance of the predecessor index, the S&P 90. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Past performance is no guarantee of future results. CDs are FDIC Insured and offer a fixed rate of return if held to maturity. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There is no guarantee that a diversified portfolio will enhance overall returns out outperform a non-diversified portfolio. Diversification does not protect against market risk. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There is no guarantee that a diversified portfolio will enhance overall returns out outperform a non-diversified portfolio. Diversification does not protect against market risk.