Q1 2025 Client letter
I hope this letter finds you and your family safe and well amidst the ongoing discussions about tariffs. The start of this year has been marked by significant volatility across all markets. As we move forward, it is clear that tariffs will remain a prominent feature of President Trump's second term. The United States continues to grapple with a substantial trade imbalance, with the goods and services deficit for 2024 reaching $918.4 billion—a $133.5 billion increase from 2023, according to the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. This imbalance is unsustainable, and we anticipate greater clarity in the coming quarters as various countries negotiate more favorable terms.
In these uncertain times, one thing is certain: tariffs will drive up prices. The Federal Reserve recently adjusted its forecast for 2025 core personal consumption expenditures (PCE) to 2.8%, up from 2.2% six months ago. Despite this, the central bank still expects inflation to hit its 2% target by 2027, indicating a one-time price increase rather than persistent inflation.
In my Q4 2024 letter, I highlighted that equity markets with above-average valuations are likely to yield lower returns in 2025 and experience higher volatility. It is crucial to understand that the market is not a reliable indicator of the U.S. economy's health. While the economy and large-cap stocks coexist, they operate in different spheres. The S&P 500 derives over one-third of its revenue from international customers, whereas exports constitute only 13.7% of U.S.
national income. Therefore, while the market downturn may reflect deteriorating prospects for internationalized large-cap U.S. stocks, it should not be extrapolated to the broader U.S. economy.
The U.S. administration's economic policy is poised to shape three key economic realities:
- Significant friction in global trade as tariffs elevate import prices, potentially leading to slower growth in the short term and reduced trade flow if sustained long term.
- Interest rate volatility as monetary policymakers navigate a landscape of slower growth and higher inflation—a challenging scenario for central bankers.
- Increased capital investment within the U.S., driven by the administration's use of both tariffs and incentives (tax, regulation, and industrial policy) to encourage domestic investment.
This marks a substantial departure from the neoliberal era, particularly the post-Global Financial Crisis period characterized by minimal trade barriers, stable interest rates, and weak capital investment. Tactically, this environment presents some risks for the traditional U.S. stock portfolio. The S&P 500 continues to trade at approximately 20x forward earnings (likely still overestimated) and is highly susceptible to trade disruptions. Bonds have performed well this year but remain vulnerable to policy-driven rate volatility.
In conclusion, diversification is essential when investing in an uncertain and imperfect environment, preparing for both best- and worst-case scenarios.
That being said, not all news should be ignored. We believe that the best investment decisions are made when investors can tune out the noise and focus on the news that is most likely to carry meaningful investment implications. The final arbiter of news, in our opinion, is the market. Therefore, while we have theories about what news matters and how it should be interpreted, we must always recognize the market’s message, especially when it conflict with our own. As we wait for additional clarity and ultimate resolution of many of today’s headlines, we will stay vigilant, adjust our portfolios accordingly and continue to focus on ‘process over prediction’.
I believe every solid relationship should center on open communication. You have several options to access the information you need to know about your portfolio, my firm, Raymond James and the financial markets. In addition to our in-person meetings and one-on-one calls, we'll also communicate with you through other channels, such as our website, newsletters and social media. You have already been receiving regular updates and emails from me. These communications are designed to provide you with insight into the ever-evolving financial markets and help build the confidence that comes from working with an experienced advisory team. If you haven't already done so, I encourage you to go to my website to learn more about my firm and access some of the recent research and articles available to you. I also utilize social media channels such as Linkedln. If you already have an account on Linkedln consider following me. These channels provide an excellent way for me to keep you up to date with relevant, timely news. Please let me know how you prefer to receive important communications and how frequently. We'll do our best to deliver. Guiding you toward financial independence is a collaborative process, and I hope you feel comfortable reaching out to me whenever you have questions, concerns or even new ideas to help me better serve you.
Regards,
Elliot Weissmark, CFP®, CPFA
Senior Vice President, Investments
Any opinion are those of Elliot Weissmark, CFP @, CPFA and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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.
