DSWM Quarterly: Q1 2025

So much has occurred during the first couple weeks of April that the first quarter of 2025 seems like ages ago. The first quarter started with markets in a very good place, the bull market in the U.S. of the past 2 years was carrying into 2025 and the Fed appeared to be close, if not successful in the “soft landing” for the economy. As the quarter progressed, trade policy headlines from the new fast-moving administration in Washington weighed on investors leading to a volatile first quarter, and a surge in volatility to start the second quarter of 2025.

The tone in the U.S. equity market changed early during the first quarter as investors began showing concerns towards the valuation of the large tech growth companies that have been the main driver of the bull market the prior two years. In late January, the market was rattled when a headline indicating that a Chinese company, DeepSeek, had an artificial intelligence (AI) assistant that used less data and was cheaper than its predecessors. What troubled the market most was DeepSeek apparently accomplished this without the use of current U.S. chip technology, which up until this point, were viewed as far superior and necessary for the output that DeepSeek achieved. Off this headline, cracks started to form in investors’ optimism towards the large cap technology stocks that for the last two years had benefited from investors’ forward-looking view of the wide sweeping benefits of AI. While the DeepSeek headline faded, investors’ weariness towards U.S. growth stocks did not and U.S. growth stocks ended the quarter down nearly 10%. On the other side, value stocks began to garner attention pushing that side of the U.S. equity market to nearly a 4.50% return for the first quarter.

A volatile U.S. equity market led investors to seek safety in the bond market, resulting in positive returns across most U.S. fixed income assets. While investors are never happy with equity market pullbacks, those with diversified portfolios (diversified meaning: equity and fixed income allocations appropriate to the investor’s risk tolerance and goals) saw their fixed income holdings provide the stability expected in the midst of elevated equity market volatility. Some might say this came as a relief, since memories of the rough market in 2022 are still fresh, during which both equity and fixed income markets showed weakness.

Elsewhere in the world, equity markets in many developed and developing countries outperformed the U.S. The shares of companies in the Eurozone were up sharply, initially benefiting from a rotation out of U.S. large cap equities. As the quarter went on, optimism grew with an election win in Germany, the EU’s largest economy, by a new administration with an agenda focused on growth. In addition, increased defense spending announcements from many EU countries and two rates cuts by the European Central Bank helped propel Eurozone equities. Japanese equities logged a rough start to the year, as U.S. tariff concerns weighed heavy on an equity market coming off back-to-back years of over 20% returns. Emerging market equities delivered mixed returns on a country-by-country basis. Chinese equities performed well over the quarter, fueled by government stimulus measures, optimism from advances in artificial intelligence (AI), and a lower starting valuation point for the quarter in comparison to many other equity markets. On the weaker side of emerging market countries were some major U.S. exporters, such as India and Taiwan, where tariff fear loomed all quarter.

It goes without saying that the 2nd quarter has started off with unprecedented volatility as investors continue to grapple with the largest hike in tariffs by the U.S. since 1930. We have seen many of the broad sweeping tariffs pulled back or postponed, exemptions on certain industries, and a focus on the trade policy with China. That said, analysts and economists are still having difficulty determining what effects these will have on the markets and the U.S. economy. Our view is it will continue to be a very fluid situation compounded with a means of policy implementation that we have never seen before. The market never rewards uncertainty, which was made abundantly clear by the start of the second quarter. With all the focus on trade policy, the level of uncertainty will continue to fluctuate as policies are announced and countries react, leading to further market volatility.

With this level of uncertainty, the chart here is a timely reminder of something I am sure you have heard us say so many times, “time in the market is far more powerful than timing the market.” The chart shows the impact that missing the top performing trading days has on the return of a hypothetical $100,000 investment in the S&P 500® index over the past 20 years. Think of it this way: You are challenged to a race where both you and the challenger are running the same distance. However, you are running different routes. Your route is all up hill, while your challenger’s route has uphill portions followed by lengthy downhill portions. Would you take that challenge? Probably not, your challenger is going to push ahead of you on the downhills while you are still running up hill. If the up hills are volatile markets and the downhills are those top-performing days, it is easy to see how missing them leaves your portfolio running up hill and getting further behind the portfolio that stayed invested. While no one at Droms Strauss is looking to challenge anyone to a race, we are here to make sure you stay on the long-term path during both the up and downhills, because we believe we know the impact if you miss the downhill run.

Droms Strauss Wealth Management

www.droms-strauss.com

(314) 862-9100

For information purposes only. Opinions expressed herein are solely those of Droms Strauss Wealth Management, unless otherwise specifically cited.  Material presented is believed to be from reliable sources, but no representations are made by our firm as to another parties' informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation. Past performance may not be indicative of future results. Indexes are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.