March 2025 Market Commentary

The Magnificent Seven stocks fell out of favor, weighing heavily on the U.S. major market indices last month. The new White House administration's tariff policies were released at a rapid and aggressive pace, marked by swift and significant changes that disrupted established trade norms. Consumer Confidence dropped while inflation expectations moved higher. The Atlanta Fed's GDPNow Model estimates a 2.8% economic contraction this quarter. Policy uncertainty remains high, but we expect clarity in the coming months that may dampen recession fears.

All the major U.S. equity indices declined in February reflecting an escalating uneasiness among investors. Bonds and non-U.S. equity markets performed admirably, generating positive returns last month. Sector returns were mixed with Consumer Staples, Energy and Real Estate all up at least 4%, while Consumer Discretionary declined 9.4% and Communications Services fell by 6.3%.

"In the stock market, the most important organ is the stomach. It's not the brain."

-Peter Lynch

Peter Lynch, a renowned investor, often emphasized that successful investing requires emotional resilience and the ability to handle market volatility without panicking. Lynch believed that although analytical skills and knowledge are important, the real challenge is maintaining composure during market downturns. Investors need to have the stomach to endure short-term losses and stay focused on long-term gains.

The stock market is off to a rough start in 2025, clearly testing investors' intestinal fortitude. As of this writing, the S&P 500 Index declined eight of the last 12 days and 20 of the first 44 trading days of the year. Year-to-date, the bellwether index is down about 2% and now trades about 6% from its all-time high level. Though the numbers are not cause for alarm, we understand that after consecutive years of 20+% gains, investors might be concerned about the possibility of a prolonged selloff. Furthermore, some of the best performing stocks of the past two years are faring much worse, including the members of the so-called Magnificent Seven. Here's a snapshot, with year-to-date performance:

Tesla                     -37%

Nvidia                   -19%

Amazon               -12%

Alphabet             -10%

Microsoft            - 8%

Meta                      +6%

Not every stock in the S&P 500 Index is down year-to-date. In fact, about 55% of S&P 500 Index stocks are up for the year at an average gain of 9%. These figures suggest that there is minimal reason for investors to worry. However, investors are on edge likely due to the rapid-fire release of executive orders and policy declarations by the Trump White House. Policy changes were expected but the dizzying succession of developments caused confusion, upsetting the markets.

Trump's Tariffs Twists and Turns

President Trump's tariff policies, marked by bold and controversial measures, sparked a global trade upheaval that reshaped economic alliances and ignited intense debates on protectionism and free trade.
The havoc began on Inauguration Day, January 20, when the White House swiftly launched the America First Trade Policy Memorandum, outlining key priorities to achieve a range of economic and non-trade-related goals. What followed over the next 45 days was breathtaking. A series of executive orders, tariffs, retaliatory tariffs, reciprocal tariffs, paused tariffs, exemptions, and amendments were issued in quick recession. The potential consequences of an escalating trade war started to become apparent, prompting investors to mitigate risk by selling some of the best performing stocks of recent and buying bonds. To understand the tariff changes implemented since President Trump took office, it's important to consider both the broader context and the specific measures enacted. A summary timeline follows:

• February 1 Trump announces 25% tariffs on goods from Mexico and Canada, as well as 10% tariffs on imports from China. The White House said the tariffs would take effect on February 4. Canada responds that day with plans to impose 25% tariffs on $155 billion worth of goods, with the first phase also taking effect on February 4.
• February 3 Trump announces a one-month pause of tariffs on Canada and Mexico after reaching agreements with each country that included commitments to bolster border enforcement.
• February 4 10% tariffs on China go into effect, as well as an end of duty-free packages from China. China retaliates, announcing tariffs, export controls, and unreliable entity designations, and threatens new antitrust investigations into Google.
• February 5 Duty-free packages from China are restored.
• February 10 Trump issues proclamations imposing 25% tariffs on steel and aluminum with a March 12 effective date.
• February 13 Trump releases the Reciprocal Trade and Tariffs Memorandum, which seeks to end non-reciprocal trading arrangements by imposing the equivalent of a reciprocal tariff with each foreign trading partner.
• February 25 The White House issues an executive order requesting the Department of Commerce (DoC) investigate whether imports of copper pose a threat to national security.
• March 1 The White House issues an executive order requesting the DoC investigatge whether imports of timber and lumber pose a threat to national security.
• March 4 Tariffs take effect on goods from Canada, Mexico and China.
• March 5 Trump orders a one-month delay of auto tariffs after a request from U.S. automakers Ford, General Motors and Stellantis (the parent company of Jeep and Chrysler).
• March 6 Trump signs executive orders temporarily pausing tariffs on Canadian and Mexican goods compliant with the United States-Mexico-Canada Agreement.

President Trump's tariff strategy -and his willingness to impose them and not just threaten their use -is evolving, as is their impact on market stability and global trade dynamics, setting the stage for ongoing economic debates and future adjustments.

Economic Recap: Consumer Confidence Concerns and Inflation Worries

While the timeline of Trump's tariffs highlights significant shifts in trade policy, the subsequent economic releases provide a clearer picture of their impact on the broader economy.

The Conference Board's Consumer Confidence Index experienced its largest monthly decline since August 2021, dropping 7.0 points to 98.3. This decline was driven by a decrease in the Present Situation Index, which fell 3.4 points to 136.5, and a significant drop in the Expectations Index, down 9.3 points to 72.9. Notably, the Expectations Index fell below 80 for the first time since June 2024, a level often associated with impending recessions. Several factors contributed to the decline in Consumer Confidence, including the previously mentioned trade policies, inflation concerns, and a more pessimistic economic outlook.

The Consumer Price Index (CPI-U) increased by 0.5% in January, leading to a 3.0% year-over-year rise in inflation. The higher-than-expected inflation (2.9% estimate) may have prompted investors to reassess the Federal Reserve's monetary policy, as interest rate futures indicated a reduced likelihood of rate cuts by the end of the year. Of note was a 0.4% rise in the food index and a 1.1% step up in the energy index. Food at home increased 0.5%, with meats, poultry, fish, and eggs up 1.9%, driven by a 15.2% jump in egg prices -the largest since June 2015. Gasoline and natural gas were both up 1.8%.

 [i]

U.S. economic growth, as measured by Real Gross Domestic Product (GDP), increased at an annual rate of 2.3% in the further quarter of 2024, in line with consensus estimates and a drop from the 3.1% annualized growth rate in the third quarter. This fourth quarter deceleration primarily reflected downturns in investment and exports that were partly offset by acceleration in consumer spending.

[ii]

Economists surveyed by the Federal Reserve Bank of Philadelphia predict the U.S. economy will expand at an annual rate of 2.5% this quarter. However, the Federal Reserve Bank of Atlanta's GDPNow Model estimates a decline of -2.8%. The GDPNow Model is not an official forecast for the Fed but rather a tool that uses available data to estimate growth. As the chart below depicts, a large drop in the forecast occurred last week, which surprised Fed followers, but the forecast represents just one month of data. Despite the decline in net exports and personal consumption expenditures in January, the outlook for the next two months remains uncertain. Nevertheless, the recession probability forecasts have ticked higher.

[iii]

Recession Watch

After reaching 67.5% in mid-January 2023, the Bloomberg U.S. Recession Probability Forecast steadily declined over the next two years, settling in at 20% two weeks ago. Since then, the odds of a recession increased reflecting the turmoil from federal layoffs, tariff moves and immigration enforcement. At 25%, the current probability forecast is below the 20-year average level (27%), but the outlook is gloomier and the pessimism is spreading to Europe. Torsten Slok, the Chief Economist at Apollo Global Management, highlighted in a recent note that recession odds are also rising in the United Kingdom and Europe.

The abrupt downward shift in economic growth expectations was anticipated by certain economists and strategists. They, and along with us, point to the new White House policies and the resulting uncertainty. In simpler terms, massive federal job cuts will push up unemployment, tariffs and the expected retaliatory tariffs will drive prices higher, and deportations and tighter immigration controls will reduce the labor pool driving up certain wages.

What we potentially get is higher inflation, stagnant economic growth, and elevated unemployment. In sum, stagflation.

Looking Ahead

The probability of a full-scale trade war is uncertain. We acknowledge at the time of this writing that certain trade policy aspects will likely have changed in the proceeding days. We also acknowledge that trade policy uncertainty and the aggressive cost-cutting measures aimed at reducing federal governmental expenses has a secondary impact on economic growth. Cancelling contracts, reducing workforce numbers, and selling assets will have far reaching consequences. The goal to streamline government operations, eliminate waste, and reduce the federal deficit, is commendable, and necessary for fiscal responsibility, but the actions could undermine essential services and functions, especially in the short term.

We expect policy clarity to emerge in the coming weeks and months which should narrow the range of possible economic outcomes in 2025. Successfully managing through unpredictable times requires patience and a focus on what you can control. Maintaining investment discipline during uncertain times can be challenging but concentrating on long-term fundamentals and eliminating emotions from investment decisions are essential for reaching long-term financial goals.

We appreciate your confidence and support and encourage you to reach out to an Old Point Wealth Management team member with any questions.