Volatility in the global capital markets intensified following President Trump’s April 2nd tariff announcement, as the proposed rates were much higher than the markets anticipated. They included a baseline 10% tariff on all imports plus a reciprocal tariff for 180 countries and territories based on the size of each country’s trade deficit with the U.S. If fully implemented, the tariff rate would have moved near 25% from 2.4% last year and higher than peak levels seen in the early 1900s. China responded with retaliatory tariffs against the U.S., sparking fears of a global trade war, as there is currently a 145% tariff on Chinese imports compared to a 125% tariff on U.S. exports to China. Global equity markets sold off significantly in the following days before President Trump announced a 90-day pause on most reciprocal tariffs on April 9th, leading to the largest one-day gain in the markets since The Great Financial Crisis. While developments remain fluid, and countries appear open to negotiations, uncertainty regarding the path of global economic growth has intensified. Markets do not like uncertainty, leading the U.S. market indexes well into correction territory from their February highs, with international equity markets not spared from declines.
U.S. interest rates, which had moved lower in the first quarter across the treasury yield curve, accelerated their declines initially following the April 2nd announcement as the market priced in uncertainty for U.S. economic growth and the potential for further rate cuts by the Federal Reserve. Rates reversed course and moved quickly higher as volatility in the fixed income markets led the administration to their 90-day pause on reciprocal tariffs. Credit spreads widened, and the U.S. dollar continued its trend lower as growth concerns for the U.S. economy intensified.
U.S. Economy and the Federal Reserve
While we expected economic growth to moderate from the above-trend growth of 2.8% annualized real GDP growth level in 2024, the tariff policy creates a heightened level of uncertainty. Business and consumer sentiment and confidence were weakening prior to the April 2nd tariff announcement, and the potential exists for further weakness in the coming months as both businesses and consumers potentially put buying decisions on hold. Depending on the final tariff level, we believe U.S. annual real GDP growth could be reduced by 0.50% to 1.50%. First quarter real GDP could be negatively impacted as companies increased imports to front-run potential tariffs.
The U.S. job market will be key to how much the economy weakens, as personal consumption represents about two-thirds of our economy. Reported job data has been slowing but remains solid as the impacts of immigration policy, the Department of Government Efficiency (DOGE) federal workforce reduction plan and tariff policy uncertainty have not yet materialized in the monthly job reports. The U.S. added 456k non-farm payrolls in the first quarter, with the March unemployment rate at 4.2%. We continue to watch weekly jobless claims for signs of any potential weakness in the job market.
Inflation trends have remained sticky and above the Fed’s 2.0% target. Tariffs, if they hold, represent a one-time step up in prices and would boost prices and inflation in the short term, pushing inflation back up above 3.0% and further away from the Fed’s desired rate. If economic growth slows significantly, it could bring down inflationary pressures.
The U.S. Federal Reserve maintained its target federal funds rate at both its January and March meetings at a range of 4.25% to 4.50%, citing solid labor market conditions and inflation remaining elevated. The Fed maintained its forecast for two 25 basis point cuts this year while reducing its economic growth forecast and increasing its inflation expectations. The Fed is in a wait-and-see mode, remaining focused on the “hard” economic data associated with their dual mandates of maximum employment and price stability. Following the April 2nd tariff announcement, markets are now expecting three to four rate cuts later this year.
Outlook and Portfolio Positioning
We expect capital market volatility to persist until further clarity on the path of tariff implementation. A global trade war will slow global economic growth and lead to higher inflation in the near term. Potential positive catalysts for the markets include a reduction or elimination of tariffs or governments reacting to slowing economic growth with significant monetary and fiscal stimulus. The U.S. Federal Reserve is still restrictive with its monetary policy and has flexibility to move rates lower if needed, while the potential for tax cuts later in the year and other fiscal policy support could help stimulate the U.S. economy.
We realize market volatility is unsettling to investors, but it is not uncommon. Markets are resilient and recover over time. It is important to understand your investment time horizon and risk tolerance during periods of market volatility. History shows that the S&P 500 has positive returns three out of every four years despite average annual drawdowns of over 14%. Investing when consumer confidence is at a low also tends to reward long-term investors.
Diversification across asset classes can help mitigate downside risk. As you are aware, Newport Capital Group model portfolios are well diversified between U.S. and international equities and fixed income asset classes, which provides potential downside protection. As needed, we rebalance portfolios to ensure you remain in line with your targeted allocation.
As such, we remain well diversified and balanced in our equity positioning between growth and value, market capitalization and global market regions. Market rotation has been significant year to date, with value stocks and international markets outperforming growth and the U.S. markets. The Magnificent Seven technology stocks were down 16.0% in the first quarter as compared to a 4.3% decline in the S&P 500 index. A weaker U.S. dollar, fiscal stimulus and still attractive relative valuations remain catalysts for international equities, in our view.
Our fixed income portfolio remains positioned toward intermediate duration and a tilt toward quality, consistent with our expectations for economic data to continue to soften. Short to intermediate rates have moved lower year to date, which has boosted fixed income returns and provided ballast for our portfolios. Higher coupon rates could help insulate our fixed income holdings from any potential movement higher in rates.
Despite market uncertainty, it is important to stay diversified and invested for the long term. Over time, many of the largest daily gains in the markets are during times of significant market downside volatility, making market timing difficult. History shows that time in the markets produces better outcomes than attempting to time the markets.
As always, we thank you for your continued support and trust in Newport Capital Group.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
Historical performance results for investment indices are provided for general educational purposes only. Indexes are unmanaged, do not incur fees or expenses (which decrease historical performance returns), and cannot be invested in directly. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Newport Capital Group, LLC) or product will be profitable or equal the corresponding indicated performance level(s).
Investing involves risk including a total loss of the principal amount invested. In addition, diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Past performance is not indicative of future returns.
Market Commentary & Outlook – Q1 2025
BY Newport Capital Group
Capital Markets Update
Volatility in the global capital markets intensified following President Trump’s April 2nd tariff announcement, as the proposed rates were much higher than the markets anticipated. They included a baseline 10% tariff on all imports plus a reciprocal tariff for 180 countries and territories based on the size of each country’s trade deficit with the U.S. If fully implemented, the tariff rate would have moved near 25% from 2.4% last year and higher than peak levels seen in the early 1900s. China responded with retaliatory tariffs against the U.S., sparking fears of a global trade war, as there is currently a 145% tariff on Chinese imports compared to a 125% tariff on U.S. exports to China. Global equity markets sold off significantly in the following days before President Trump announced a 90-day pause on most reciprocal tariffs on April 9th, leading to the largest one-day gain in the markets since The Great Financial Crisis. While developments remain fluid, and countries appear open to negotiations, uncertainty regarding the path of global economic growth has intensified. Markets do not like uncertainty, leading the U.S. market indexes well into correction territory from their February highs, with international equity markets not spared from declines.
U.S. interest rates, which had moved lower in the first quarter across the treasury yield curve, accelerated their declines initially following the April 2nd announcement as the market priced in uncertainty for U.S. economic growth and the potential for further rate cuts by the Federal Reserve. Rates reversed course and moved quickly higher as volatility in the fixed income markets led the administration to their 90-day pause on reciprocal tariffs. Credit spreads widened, and the U.S. dollar continued its trend lower as growth concerns for the U.S. economy intensified.
U.S. Economy and the Federal Reserve
While we expected economic growth to moderate from the above-trend growth of 2.8% annualized real GDP growth level in 2024, the tariff policy creates a heightened level of uncertainty. Business and consumer sentiment and confidence were weakening prior to the April 2nd tariff announcement, and the potential exists for further weakness in the coming months as both businesses and consumers potentially put buying decisions on hold. Depending on the final tariff level, we believe U.S. annual real GDP growth could be reduced by 0.50% to 1.50%. First quarter real GDP could be negatively impacted as companies increased imports to front-run potential tariffs.
The U.S. job market will be key to how much the economy weakens, as personal consumption represents about two-thirds of our economy. Reported job data has been slowing but remains solid as the impacts of immigration policy, the Department of Government Efficiency (DOGE) federal workforce reduction plan and tariff policy uncertainty have not yet materialized in the monthly job reports. The U.S. added 456k non-farm payrolls in the first quarter, with the March unemployment rate at 4.2%. We continue to watch weekly jobless claims for signs of any potential weakness in the job market.
Inflation trends have remained sticky and above the Fed’s 2.0% target. Tariffs, if they hold, represent a one-time step up in prices and would boost prices and inflation in the short term, pushing inflation back up above 3.0% and further away from the Fed’s desired rate. If economic growth slows significantly, it could bring down inflationary pressures.
The U.S. Federal Reserve maintained its target federal funds rate at both its January and March meetings at a range of 4.25% to 4.50%, citing solid labor market conditions and inflation remaining elevated. The Fed maintained its forecast for two 25 basis point cuts this year while reducing its economic growth forecast and increasing its inflation expectations. The Fed is in a wait-and-see mode, remaining focused on the “hard” economic data associated with their dual mandates of maximum employment and price stability. Following the April 2nd tariff announcement, markets are now expecting three to four rate cuts later this year.
Outlook and Portfolio Positioning
We expect capital market volatility to persist until further clarity on the path of tariff implementation. A global trade war will slow global economic growth and lead to higher inflation in the near term. Potential positive catalysts for the markets include a reduction or elimination of tariffs or governments reacting to slowing economic growth with significant monetary and fiscal stimulus. The U.S. Federal Reserve is still restrictive with its monetary policy and has flexibility to move rates lower if needed, while the potential for tax cuts later in the year and other fiscal policy support could help stimulate the U.S. economy.
We realize market volatility is unsettling to investors, but it is not uncommon. Markets are resilient and recover over time. It is important to understand your investment time horizon and risk tolerance during periods of market volatility. History shows that the S&P 500 has positive returns three out of every four years despite average annual drawdowns of over 14%. Investing when consumer confidence is at a low also tends to reward long-term investors.
Diversification across asset classes can help mitigate downside risk. As you are aware, Newport Capital Group model portfolios are well diversified between U.S. and international equities and fixed income asset classes, which provides potential downside protection. As needed, we rebalance portfolios to ensure you remain in line with your targeted allocation.
As such, we remain well diversified and balanced in our equity positioning between growth and value, market capitalization and global market regions. Market rotation has been significant year to date, with value stocks and international markets outperforming growth and the U.S. markets. The Magnificent Seven technology stocks were down 16.0% in the first quarter as compared to a 4.3% decline in the S&P 500 index. A weaker U.S. dollar, fiscal stimulus and still attractive relative valuations remain catalysts for international equities, in our view.
Our fixed income portfolio remains positioned toward intermediate duration and a tilt toward quality, consistent with our expectations for economic data to continue to soften. Short to intermediate rates have moved lower year to date, which has boosted fixed income returns and provided ballast for our portfolios. Higher coupon rates could help insulate our fixed income holdings from any potential movement higher in rates.
Despite market uncertainty, it is important to stay diversified and invested for the long term. Over time, many of the largest daily gains in the markets are during times of significant market downside volatility, making market timing difficult. History shows that time in the markets produces better outcomes than attempting to time the markets.
As always, we thank you for your continued support and trust in Newport Capital Group.
Download the full commentary here.
Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
Historical performance results for investment indices are provided for general educational purposes only. Indexes are unmanaged, do not incur fees or expenses (which decrease historical performance returns), and cannot be invested in directly. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Newport Capital Group, LLC) or product will be profitable or equal the corresponding indicated performance level(s).
Investing involves risk including a total loss of the principal amount invested. In addition, diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Past performance is not indicative of future returns.
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