The first quarter of 2025 has ended, and while I usually take a few days to review the quarter, gather my thoughts and gaze into my ever cloudy crystal ball, this quarter also gave me the added benefit of allowing me to be able to comment on the president’s much anticipated tariff policy. Sometimes, it pays to let the dust settle before trying to make sense of the landscape. And in this case, that dust came from Washington, where a new round of tariff announcements is more of a haboob sandstorm, and it sent a jolt through global markets.
Before we dig into that, let’s set the stage with how portfolios closed out the first quarter of 2025.
A Quarter of Quiet Strength—and a Surprise Ending
Markets largely coasted through Q1, with returns flat to slightly positive depending on exposure to large-cap growth stocks. Clients with high exposure to growth stocks saw negative returns during the quarter due to worries that competition out of China would hurt their investments in artificial intelligence. But while domestic large-cap growth was on pause, other corners of the market were quietly delivering.
For the first time in quite a long time, international equities stepped into the spotlight. The Vanguard FTSE European Markets ETF (VGK) gained a solid +11.07% during the quarter—driven by hopes that Germany and the European Union would make legislative changes to allow for more fiscal stimulus and improve the earnings outlook across key European economies.
Bonds, after being the forgotten stepchild for years, continued their comeback tour. The Bloomberg U.S. Aggregate Bond Index rose +2.78%, offering both stability and income.
This was a reminder for diversified investors that not every party is hosted by the S&P 500.
Tariffs: The Sequel Nobody Asked For
Just as Q1 wrapped, markets were confronted with a plot twist: fresh tariffs on imported goods. The equity markets didn’t take it well—and for good reason.
Having been a student (and teacher) of markets for decades, I’ve learned a few things about how the economy reacts to trade policy. One of the clearest lessons I recall from studying international trade is that tariffs are rarely helpful for growth. They increase friction, distort incentives, and almost always lead to higher consumer prices.
And here’s a common misconception worth clearing up: tariffs are not paid by countries—they’re paid by the companies doing the importing. Those companies often pass the cost along to consumers. So, while headlines might suggest otherwise, this is not a tax on foreign producers—it’s a tax on the things we buy.
From a risk perspective, what makes this even trickier is that trade policy is now a one-person variable. Investors don’t just need to model economic data—they need to guess what the president might decide on a given Tuesday. That’s a legislative risk, and it’s one of the hardest forms of risk to quantify. It’s no surprise that since the announcement, we’ve seen investors shift quickly toward safer assets like Treasuries.
Bond Market: The Canary in the Coal Mine
If you’ve read my previous letters, you know I have a soft spot for bonds—not just because they generate income, but because they offer insight. In times of stress, they often speak before the equity markets even clear their throat.
This latest flight to quality is a page straight from the history books:
- In 1997, the Asian Currency Crisis triggered a sharp pivot to U.S. bonds.
- In 2002, accounting scandals (hello, Enron and WorldCom) sent shockwaves through corporate credit.
- In 2020, it was the pandemic that turned the Treasury market into a temporary safe haven.
Now in 2025, we’re seeing echoes of those events: richly valued equities, a sudden external policy shock, and a repricing of risk.
The lesson? Markets tend to underestimate the probability of tail events—until one happens. That’s why we build portfolios that can withstand surprises, not just perform in smooth sailing.
Looking Ahead: Stay Nimble, Stay Grounded
So, what’s next?
Much depends on how the tariff story unfolds. If the policy escalation continues, we could see downward pressure on corporate margins and consumer spending. If it stalls—or reverses—we could be back to debating Fed policy and earnings season within weeks.
Regardless of the headlines, our approach remains unchanged:
We have built our portfolios with the understanding that events like these, which throw the market into confusion, come along fairly regularly. We never want to be in a position where we are forced to sell risky assets during one of these market episodes. By being diversified, we can fund cash flow needs from assets that are holding their value, namely fixed income securities, until markets calm down. We can also take advantage of volatility by regularly rebalancing our portfolios, which enables us to purchase small amounts of assets that are falling in value. It can be a very uncomfortable thing to do, but by sticking to our investment policy, we will be able to meet our investment goals over our investment horizon long after this current episode is over.
- Global diversification helps us sidestep overconcentration in any one region or asset class.
- Fixed income exposure, especially with real yields now attractive, provides stability and ballast.
- Rebalancing, particularly from areas that outperformed last year, ensures discipline over emotion.
- Risk awareness, not risk avoidance, is our compass.
- The bond market continues to signal that neither inflation nor recession is imminent. But, as always, we’ll be watching closely for signs of change—and adjusting portfolios accordingly.
Thank you, as always, for your trust, your partnership, and your belief in a long-term view. If you’d like to review your portfolio or discuss any of the recent developments, I’m just a phone call or email away.