Encouraging data including a downtick in inflation and the prospect of interest rate cuts early in the year fueled optimism, bolstered by hopes of deregulation and the extension of tax cuts put into place during the first Trump presidency. Stocks rallied on hopes for a new era of positive growth policies.
But there were mixed signals mid-quarter from many economic indicators. Job numbers faltered somewhat but regained strength in March with job creation exceeding expectations yet tempered by January and February numbers being revised downward.
Stubborn inflation in food and housing had begun to eat away at consumer confidence, and early speculation about the administration’s aggressive trade policies fed layoff fears and ushered in an atmosphere of uncertainty.
Warning Signals
The President’s threats of specific tariffs followed by sudden announcements of delays, agreements, or reversals sent shivers through the markets and put many business investors into a stall mode, unable to plan for the months ahead.
The speculation and fear gathered steam as the second quarter approached, culminating in a slate of historically severe tariffs on what the President dubbed “Liberation Day” as the second quarter began.
The aftermath sent markets plummeting in a broad-based selloff that brought the DJIA and S&P 500 into correction territory and caused the NASDAQ to slip into a bear market. The subsequent losses are estimated to have wiped out trillions of dollars in global equity value, representing a significant percentage of global GDP. As a result, economists are predicting slower growth and worries remain about GDP, while layoffs and recession fears have resurfaced.
Mixed Indicators
Countering these concerns are some hopeful signs. Stocks have regained some of their value lost during the selloffs but remain volatile. Inflation continues its downward trend, while job numbers and retail spending continue to exceed expectations.
Wall Street earnings have been a mixture of strong trading results but are plagued by uncertainty about the future due to trade disputes and potential slowdowns. Some banks have reported better-than-expected profits but fears remain.
There are still many questions about how tariffs and the trade war with China will play out in the months ahead. These policies have their supporters and detractors but are venturing into unchartered waters unduly marked by confusing communications and a sense of chaos.
Domestically, lawmakers are also grappling with a budget, the Trump tax cut extension, and deregulatory policies. Also in focus are stubborn inflation and inflationary pressures as well as the anticipation of further interest rate cuts by the Fed.
Lesko Investment Committee Outlook
Fueled by early optimism over the new administration’s pro-growth policies (fairer trade, lower taxes, deregulation), the S&P 500 rallied 2.7% in January to start the year. It went on to hit new highs early in February, only to drop significantly since that time.
The Trump administration’s tariffs and trade policies have been the dominant force driving concerns over economic growth and fueling volatility in the markets. Markets do not like uncertainty and are currently pricing in more negative scenarios including an ongoing trade war and an economic recession in the U.S.
We do anticipate elevated volatility and risk to continue through Q2 but are optimistic about the second half of the year. Conditions could change very quickly if major trade deals are made and/or the Fed intervenes to support a slowing economy.
Perspective for What’s Ahead
In volatile times, there’s a strong temptation to succumb to a sense of urgency and venture toward immediate action instead of resisting such impulses and adopting a “wait-and-see” approach.
The best course of action is to remind yourself of your own investing goals and to maintain a long-term perspective. With tax season behind us, it could be an excellent time to schedule a review with your advisor to make sure your portfolio is diversified and well balanced. You can review your asset allocations and self-check your tolerance for the continued volatility that seems to be ahead.
Our entire team at Lesko Financial remains vigilant toward risks to portfolios and the economy. We’re dedicated to helping our clients successfully navigate this market environment. Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.