First Quarter 2025 Market and Economic Review

As the first quarter of 2025 closes, markets have served up a complex mix of signals. While international equities posted surprising strength, U.S. large-cap stocks faced renewed volatility and declines. The S&P 500 fell 4.6%, the Dow Jones Industrial Average lost 1.3%, and the Nasdaq slid 10.4% during the quarter.

Behind those numbers lie several undercurrents: persistent inflation, evolving central bank policies, renewed tariff activity, and a geopolitical landscape adjusting to a post-election U.S. policy outlook.

As wealth managers, our job isn’t to chase headlines but to distill what matters most to our clients and adjust proactively without overreacting. Here’s our view of the current environment.

Interest Rates Holding Steady

The Federal Reserve kept interest rates unchanged this quarter, holding the federal funds rate at 4.25% – 4.50%. While inflation has cooled from recent highs, it remains above target, particularly in service sectors and wages. As a result, the Fed has continued to stress patience.

Although markets entered 2025 expecting multiple rate cuts, those expectations have been tempered. Fed Chair Jerome Powell has signaled that any easing will be data-driven and gradual.

We still see real value in fixed income for investment portfolios, especially shorter-duration positions offering strong yields. Rather than speculate on the exact timing of policy shifts, we’re building fixed-income allocations that balance income, liquidity, and resilience.

Inflation & Tariffs: A Sticky Combination

Headline CPI came in at 2.8% for the month of February, a mark still slightly higher than was hoped (March figures will be announced in a couple of days). And while energy prices have softened, housing and wage costs remain firm. This stickiness is one reason the Fed is staying cautious.

Adding to that complexity, the U.S. reinstated targeted tariffs on certain Chinese imports in February, including EVs, solar components, and semiconductors. While limited in scope, these actions signal a return to a more protectionist stance. China’s potential countermeasures could disrupt sensitive supply chains and reignite pricing pressure in select industries. More widespread tariffs announced earlier this month have caused deeper declines in both domestic and global markets and will likely create continued volatility in the near-term.

While these developments aren’t cause for immediate concern, they reinforce the importance of maintaining flexibility and diversification in portfolios — especially for those holding concentrated positions or assets tied closely to global trade flows.

Global Equities: Quietly Outperforming

One of the more underappreciated stories of Q1 was the strength in non-U.S. equities. The MSCI EAFE index rose 8.1% through March, driven by strong performance in Europe and Japan.

In Germany, policymakers are stepping up investment in energy independence and defense in response to global instability. In Japan, the central bank ended its negative interest rate policy — a milestone signaling a turn in confidence and growth prospects.

One takeaway from these developments is that global markets are no longer just followers of U.S. trends. They’re responding to their own cycles and catalysts. These improvements add to the opportunities in international markets as part of a broader diversification strategy — particularly for portfolios historically underweight in this space.

Alternative Ways for Managing Risk

Volatility and uncertainty often expose the limitations of traditional stocks and bonds. In the current environment, we’re finding powerful use cases for alternative investments and structured notes.

Structured notes — with defined levels of downside protection — are especially useful when markets are turbulent. They help clients stay invested while mitigating drawdown risk. Option-based strategies are also being used to dampen equity volatility within portfolios.

While we are not utilizing structured yield notes specifically, we are increasing alternative income exposure through avenues such as private credit and real assets. These strategies allow us to seek enhanced yields in a more controlled risk environment compared to traditional bonds, which remain sensitive to rate moves.

It’s important to note that these tools aren’t replacements for stocks or bonds — they’re strategic complements. They offer flexibility and income potential and help us construct portfolios that can weather volatility without sacrificing long-term objectives.

Post-Election Policy Outlook

The 2024 presidential election is now behind us, but uncertainty remains around the future direction of fiscal and tax policy. The national debt has climbed to $36.2 trillion, putting increased pressure on policymakers to consider spending reforms, revenue increases, or both in the coming years.

While specifics are still developing, we expect ongoing debate around the treatment of capital gains, corporate taxation, and estate planning rules — especially as we approach the scheduled 2026 estate tax exemption sunset.

Wherever the political dialogue leads, we’ll continue to plan for multiple outcomes. That includes engaging clients in proactive legacy planning, trust reviews, and scenario testing to ensure that whatever policy changes occur, long-term goals remain secure.

Looking Ahead

Our investment approach is not about timing markets but building a resilient foundation that can weather uncertainty and capture the upside when it appears.

Here’s how we’re putting that into action this quarter:

• Rebalancing portfolios to reflect current valuations and economic trends
• Maintaining strong fixed-income exposure to take advantage of high yields
• Leveraging structured notes and alternatives to manage volatility and complement income goals
• Adjusting allocations as needed while keeping individual risk targets intact
• Re-engaging with estate planning professionals to prepare for upcoming tax law changes
• Stress-testing financial plans to ensure flexibility and readiness

We know this environment presents challenges, but it also presents opportunities. And we’re committed to helping our clients navigate both with clarity, confidence, and care. As always, we appreciate your trust and look forward to the conversations ahead.