Capital Markets Update April 2025

We, alongside all of you, have been processing the implications of the Trump Administration’s recently announced tariff program. While their desire to implement tariffs was broadly known, the magnitude of the tariffs and the novel manner in which they were calculated have clearly been a negative shock to financial markets. Consensus economic forecasts have turned from slow growth to contraction. Inflation forecasts have increased from the 2-3% range to above 4%. Stock prices should always react negatively to such a turn of events.

Whether or not one believes that long term results will be beneficial, over the shorter and medium term the US imposed tariffs and those imposed by our retaliating trading partners, are bound to increase costs for all American businesses and consumers. In a sense, given the equity markets strong performance over the prior two years, some kind of sell-off was inevitable. By common valuations metrics such as Price/Earnings (“P.E”) ratios and others, US equities had become fully priced if not expensive. The hype around Artificial Intelligence and Data Center demand had reached an almost fever pitch, and this was reflected in related equity prices. Although it has not been pleasant, the decline in the S&P 500 is approximately 15% from its February highs, equity markets now represent a much more compelling opportunity.  

The benefits of diversification were also apparent during this market turmoil as Gold and Fixed Income have contributed positively to overall portfolio returns. Our allocation to large cap non-US equities has also been a source of relative strength, as it remains with a slightly positive 2025 total return. Like the 2020 Covid pullback of 30% in equities or any number of significant selloffs over the last 10 years -some specific parts of the market look attractive. Dividend yields on value equities have risen to bond like levels, and some technology stocks are down 30% and even 40%. This has created opportunities for great long-term investments.

While we cannot guess how much economic pain the Trump administration is willing to tolerate, we believe the pressure to course correct will soon be substantial. Whatever probability one assigns to this outcome, it is a compelling reason for staying invested. Despite the administration’s policies that markets do not like, we expect there will be some to which markets will react more positively.  At the top of this list are renewing the tax cuts from the first Trump Administration set to expire later this year.

As is also typical in market turmoil, the US Treasury market has seen a flight-to-quality bid, as the 10 Year yield has declined by 0.85% to its current 3.95% yield. It stands to reason that given some level of economic distress, the Federal Reserve will step into lower short-term interest rates. The salutary effects of lower interest rates will quickly become evident in renewed demand for housing and lower cost mortgages. Corporations will be able to lower borrowing costs, and lower rates will imply higher terminal values for any longer-term projects.

In sum, we are actively monitoring the situation and working to understand the broader impacts. For most client liquidity needs, we have been strategically positioned with cash and Fixed Income. We do feel at some point, however, there will be a significant opportunity to rebalance portfolios and increase equity exposure.  It is precisely in times like these that we learn if our asset allocation is suitable for our risk tolerance. 

If you should have any questions on this topic or any other, please do not hesitate to contact us.