What a challenging start to the second quarter it has been. Last week, the tariffs that were announced to the world were much more significant than anyone expected and now the “dealmaking process” has begun with no shortage of media coverage.
During the first quarter of 2025, large cap equities declined -4.3% (for the first time in six quarters) as did small cap stocks which dropped -9.5%. On the positive side, international stocks led the way with a return of +7.0%, followed by bonds which returned +2.8%.1 The outperformance of international vs domestic large cap stocks (+11.3%) was the widest margin we have seen during a quarter dating back to the second quarter of 2002. Getting outperformance from both international stocks and bonds was a big boost to portfolios in the first quarter as it helped minimize the losses in domestic stocks and even kept some balanced portfolios positive.
That trend continued in the first week of the second quarter as volatility increased and losses accelerated in most asset classes. Most bonds and fixed income investments continue to be positive in 2025 and international stocks continue to be one of the top surprise equity performers. While bonds and international stocks have not kept portfolios positive, they have played impressive defense to help mitigate some of the losses that portfolios might have otherwise experienced. Asset allocation has been challenged in recent years as a handful of stocks have led the market, but that theme has shifted in 2025 as those names are some of the biggest year-to-date underperformers.
Despite the ongoing tariff headlines and the potentially escalating trade war with China and others, economic fundamentals remain strong for now as evidenced by the most recent jobs report for March which added 228,000 jobs and had an unemployment rate of 4.2%.2 Also, the March Consumer Price Index (CPI) was reported at 2.4%, which was 0.2% better than expected. 3 Understandably, both statistics could change in the coming months depending on the results of the tariffs.
As we mentioned in our market update that was sent last week, we understand these are unsettling times; however, volatility is part of market behavior and is it not out of the question to have regular declines in any given year. In fact, most twelve-month time periods will see a pullback of 10% or more.
As always, we are grateful for your trust and partnership. Should you have any questions or wish to schedule a portfolio review, please do not hesitate to reach out.