First Quarter Overview
Over the course of the first three months of 2025, it would be understandable if investors felt they had been transported to the fictional planet of Bizarro World. This planet, created by DC Comics, is a place where everything is opposite from what we experience on Earth. As the first quarter progressed, we saw asset classes that performed poorly in the fourth quarter perform quite well and sectors that had been equity market leaders transition into the role of market laggards. And we cannot leave out interest rates which rose in the fourth quarter only to fall in this first quarter.
The policy uncertainty and heightened volatility that occurred throughout the first quarter provided the perfect backdrop for the interplanetary emigration to Bizarro World. The introduction of various tariffs and the inconsistency of their implementation was one of the major contributors to the uncertainty, as well as the assertive efforts implemented to reduce federal spending. To put these events into a quantitative perspective we reference the U.S. Economic Policy Uncertainty Index. This measure is sourced from U.S. newspapers and looks for terms such as “economic” and “uncertainty.” The frequency at which these terms appear is then transitioned into index form. As 2024 ended, the index registered a reading of 109.44. On March 31, the index sat at a level of 483.96.
Other indications of the concern emanating from heightened uncertainty came from sentiment indices such as the AAII Investor Survey. For the week ending March 26, 27.4% of respondents were recorded as bullish on the stock market over the next six months while 52.2% were bearish. These readings are
substantially different from the long-term averages of 37.5% bullish and 31.0% bearish, and they reflect the heightened concern on the minds of investors.
On the global front, the Bloomberg Global Trade Policy Uncertainty Index also reflected heightened concern as it rose to a record level in March increasing tenfold since October of last year.
Economic Outlook
One of the by-products of increased uncertainty has been a reduction in the forecast for U.S. gross domestic product (GDP) growth. Currently the outlook for the first quarter is for GDP to increase 1.5%. This represents a meaningful decline from the anticipated level of growth for the fourth quarter of 2024 which is currently forecast at 2.3%. More modest growth is anticipated throughout 2025 resulting in an estimated growth of 1.5% to 1.8%, significantly lower than the 2.7% average rate of growth over the past three calendar years. While the level of growth anticipated for the first quarter and the year represents a significant slowing, these periods still portend continued growth and not contraction. However, given the potential impact of, and the uncertainty associated with, heightened tariffs on the economy, the probability of recession has been increasing.
While the base expectation is for slower, yet positive growth, we are, and will continually be, evaluating new information and data as it’s released to determine if a different path for the economy is on the horizon. Specifically, we will be looking very closely at the hard economic data as it is released. This contrasts with the various series of soft data being released, which is represented by survey responses like those from ISM, and the various consumer confidence measures. Specific examples of hard data include employment data, retail sales, etc.
ASSET ALLOCATION OVERVIEW
As previously mentioned, U.S. financial assets experienced a divergence in performance in the first quarter similar to their experience in the previous quarter. The divergence occurring in the first three months of 2025 is exactly the opposite of the one that occurred in the final quarter of 2024. This quarter saw bonds providing a positive return to investors while domestic equities fell, just the opposite of what happened in the prior quarter. Specifically, the broad bond market saw a return of 2.8% for ICE BofA U.S. Corporate, Government and Mortgage Index, while the Russell 3000 Index of domestic stocks returned -4.7%. And, like fixed income, foreign equities delivered positive results for the quarter with the MSCI Emerging Markets Index advancing 2.7% and the MSCI EAFE Index representing developed foreign markets, which provided a return of 3.0%.
In our asset allocation positioning, we maintained the neutral status for each of our seven investment objectives relative to their respective static benchmarks. As we have discussed in previous commentary, there have been numerous changes in leadership that have occurred across asset classes in the recent past. These leadership shifts have had limited duration before reverting to prior scenarios. Given our philosophy of focusing on the long-term investment environment, we have not attempted to catch these “lightning in a bottle” shifts that have repeatedly come and gone. Rather, we continue to emphasize the longer-term horizon with our allocation strategy. That is not to say some of the changes experienced in the first quarter, when it comes to governmental policy regarding tariffs and spending, will not lead to a scenario that would lend itself to shifts in our asset allocation. And, in fact, we are continually looking through the various outcomes that may materialize to determine if such an opportunity is on the horizon.
In closing, the volatility and uncertainty experienced throughout the first quarter leads us to add even more emphasis to our traditional closing recommendation for investors to spend some time reviewing their long-term investment objectives. Periods like the last quarter, which reflect the heightened levels of uncertainty, provide ample incentive for a review of goals, risk tolerance and time horizon.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.