Embracing the Rain for the Rainbow
Dear Clients and Friends:
In the words of comedian Steven Wright, “If you want the rainbow, you need to put up with the rain.” This sentiment encapsulates the essence of investing, where enduring short-term challenges can lead to long-term gains. Just as the rain precedes the rainbow, market fluctuations are often a precursor to financial growth.
While we often focus on the potential rewards of investing, it’s crucial to acknowledge the inherent risks. Consider a study that suggests eating a hamburger could shorten your life by seven minutes. While this might seem trivial, it underscores the broader theme of balancing short-term pleasures against long-term outcomes.
In the context of the stock market, this concept translates to how we approach our investments. Imagine knowing the market might drop by 20% before you could double your money. It’s a daunting thought, yet for many investors, staying the course and adopting a buy-and-hold strategy can lead to substantial long-term gains.
“The Circle of Life: (cue Lion King Song) reminds us that there is a continuous cycle of birth, life, death, and rebirth. The recent stock market performance seems to embody that all in one trading day. It is indeed stressful to watch—but when viewing this under the lens of a predictable pattern, or a natural cycle, it gives us courage to persevere through these times.
This brings us to a concept that transcends both investing and life itself--remembering and honoring those who matter to us. On a recent trip to Vietnam, I learned their tradition of visiting gravesites to pay respects to the departed. It reflects a belief that neglecting the dead can lead to misfortune for the family. Similarly, in our lives, reconnecting with those we care about can enrich our present and future.
I created the JP Taravella High School Baseball Hall of Fame, to celebrate and reconnect with old friends, cherishing the bonds we share and honoring the living. As my father wisely says, “I don’t care who’s at my funeral, I’ll be dead.” This reminds us to focus on the relationships and moments that truly matter while we are here.
Now back to our regularly scheduled program………
Quarterly Insights – April 2025
Policy Uncertainty Weighs on Markets in Q1
Volatility gripped markets in the first quarter of 2025 and the major stock indices saw moderate declines as chaotic U.S. trade and tariff policies caused a steep plunge in business and consumer confidence, which raised concerns that economic growth would dramatically slow and corporate earnings growth would disappoint.
Stocks started the new year by extending the declines of late 2024, as worries the Federal Reserve could pause interest rate cuts weighed on the markets early in January. However, solid economic data, encouraging inflation readings and positive commentary from Fed officials about future rate cuts pushed back on those fears and the S&P 500 recovered much of those initial losses by mid-month. Additionally, stocks rallied into and following Inauguration Day, as investors anticipated a “pro-growth” administration taking power while fears of dramatic tariffs on “Day One” of the Trump presidency went unfulfilled. The S&P 500 hit a new all-time high shortly after President Trump’s inauguration and the rally continued into late January after the Fed signaled it still expected to cut rates in 2025, further calming fears of a pause in rate cuts. However, at the very end of January, investors got a preview of looming tariff/trade volatility when President Trump threatened 25% tariffs on Colombia. However, those tariffs were not ultimately implemented, so markets largely ignored them and stocks finished January with a solid gain.
Trade and tariff policy became a major influence on markets in February, however, and dramatically increased market volatility by month-end. During the first few days of February, President Trump threatened and then delayed 25% tariffs on Mexico and Canada, which temporarily spiked market volatility. However, the one-month delay of those tariffs led markets to believe that President Trump was using tariff threats as a negotiating tactic and that substantial tariffs would not be implemented after all. That sentiment helped to ease investor concerns while economic data remained solid. Those factors combined to send the S&P 500 to a new all-time high on February 19th. However, the rally would not last. In late February consumer confidence declined dramatically and some economic reports implied the trade and tariff uncertainty was starting to slow economic growth. Those fears were reinforced when the Atlanta Fed’s GDPNow turned negative, implying economic growth may be stalling. Meanwhile, tariff threats and general policy volatility continued through the end of the month and that, combined with plunging consumer sentiment, sparked a “growth scare” amongst investors that weighed on stocks and sent the S&P 500 marginally lower in February.
The market declines accelerated in March as President Trump made good on his threat to implement 25% tariffs on Mexico and Canada (and an additional 10% tariff on China). President Trump delayed some of those tariffs on Mexico and Canada until early April, but many other tariffs were left in place and that shattered investors’ belief that tariff threats were just a negotiating tactic. Meanwhile, several corporations from various sectors began to lower earnings guidance, citing reduced consumer spending and business investment. Those guidance cuts reinforced fears that policy uncertainty could cause an economic slowdown, and the S&P 500 fell to a six-month low. In late March, markets tried to rebound amidst a lull in tariff threats but it didn’t last as President Trump announced 25% auto tariffs on March 26th, sending stocks lower once again. The S&P 500 finished the quarter near the year-to-date lows.
In sum, investor optimism for a pro-growth agenda and tax cuts was replaced by rising concerns about a new global trade war and a slowing U.S. economy, as policy uncertainty and ineffective communication crushed investor and consumer confidence.
First Quarter Performance Review
Market internals revealed that while the S&P 500 logged a moderately negative return for the quarter, the declines in the index were mostly due to sharp drops in widely held technology and consumer stocks, as other parts of the market proved resilient.
To that point, on a sector level, only four of the 11 S&P 500 sectors finished the quarter with a negative return and two of those four sectors saw only fractional declines. As mentioned, the consumer discretionary and tech sectors were, by far, the worst-performing sectors in the first quarter as both saw substantial declines. And, since those two sectors carry some of the largest weights in the S&P 500, they weighed on the overall index performance. The consumer discretionary sector was the worst performer for the quarter as it was hit by intense weakness in one of the largest consumer stocks (Tesla) combined with general concerns about lower consumer spending in the face of policy uncertainty. The technology sector was the other substantially negative performer in the first quarter as tech stocks fell following the debut of the Chinese AI program DeepSeek, which challenged assumptions about the future economic benefit of AI for major tech firms.
Looking at sector outperformers, energy was the top-performing sector in Q1 thanks to rising demand expectations following strong Chinese economic data and after some European countries committed to increasing debt to fund economic growth. The healthcare, utilities and consumer staples sectors logged modest gains in Q1, as those traditionally defensive sectors were viewed as more insulated from any new trade wars and tend to be more resilient in the face of an economic slowdown.
From an investment style standpoint, value significantly outperformed growth in Q1 as growth strategies posted substantial losses due to their large weightings of tech and consumer stocks. Value strategies logged a slightly positive return over the past three months and benefited from exposure to a broader array of sectors that traded at lower valuations and were not as impacted by the negative headlines in the first quarter.
Finally, looking at performance by market cap, small caps declined sharply in the first quarter and lagged large caps thanks to a combination of rising worries about economic growth and still high interest rates. Large cap indices also declined in the first quarter, although those losses were more modest.
Source: YCharts
Internationally, foreign markets massively outperformed the S&P 500 and finished the quarter with a substantially positive return. Foreign developed markets saw the largest gains and outperformed emerging markets after Germany and other EU countries signaled a willingness to increase deficit spending to boost economic growth and defense. Emerging markets logged more modest gains thanks to better-than-expected Chinese economic data.
Source: YCharts
Commodities were modestly positive in the first quarter as strength in gold helped to boost the major commodity indices. Gold hit a new record high and traded above $3000/oz. thanks to a weaker U.S. dollar and increased demand following policy volatility from the new administration. Oil logged a small loss but finished well off the lows of the quarter thanks to better-than-expected Chinese economic data and expectations for more demand from Europe.
Source: YCharts/Koyfin.com
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a modestly positive return for the first quarter of 2025. Better-than-expected inflation readings and general concerns about economic growth boosted bonds broadly and helped longer-duration bonds to outperform shorter-duration bills and notes, as investors sought higher long-term yields amidst policy uncertainty.
Turning to the corporate bond market, higher-quality but lower-yielding investment-grade bonds outperformed higher-yielding but lower-quality bonds in the first quarter and that reflected investor concerns about future economic growth amidst policy uncertainty. However, both investment-grade and high-yield corporate bonds finished the first quarter with modest gains, reflecting a still present sense of economic optimism from bond investors.
Source: YCharts
Second Quarter Market Outlook
Stocks begin the second quarter of 2025 following the worst quarterly performance in nearly three years and facing dual market headwinds of policy uncertainty and potentially slowing economic growth. However, while clearly markets are facing legitimate headwinds, it’s important to realize that stocks fell in the first quarter mostly on fears of what might happen in the economy, not because of what is actually occurring. Point being, if future policy decisions and an economic slowdown aren’t as bad as currently feared, it could cause a substantial market to rebound in the coming months.
Starting with trade and tariff policy, there can obviously be improvement in the communication strategy from the administration regarding its policy goals and there were signs late in the first quarter that officials realized their errors and were working to communicate more directly, effectively and consistently with markets. Regardless of what actual tariff policy ultimately looks like, improvement in communication of the administration’s policy goals will be a market positive and could help end this pullback.
Turning to economic growth, while fears of a slowdown surged in the first quarter, economic data stayed mostly resilient. Jobless claims remained subdued, measures of manufacturing and service activity showed continued expansion, and the unemployment rate remained historically low, close to 4.0%. Put simply, there was little in the actual data in Q1 to imply the economy is weakening. If economic data stays solid throughout the second quarter, it will push back on those recession fears and could help fuel a rebound in the markets.
On market valuation, the declines of the first quarter have resulted in the S&P 500 trading at a more reasonable valuation compared to the start of the year, as extremely bullish investor sentiment has been replaced by a decidedly bearish outlook (which has historically set the stage for a market rebound). Bottom line, the market was richly valued at the start of the year and investor sentiment was complacent, but the volatility of the first quarter has removed both of those conditions and that is a general positive for the markets.
Finally, while the S&P 500 suffered moderate declines in the first quarter, there were many parts of the market that weathered the volatility and posted positive returns. More than half of the sectors within the S&P 500 logged positive returns in the first quarter while two other sectors only saw slight declines, underscoring that the volatility we witnessed in the first quarter didn’t result in a broad market wipeout and there are sectors and factors that can continue to outperform in this environment.
Bottom line, the first quarter did contain several negative surprises for investors and we begin the second quarter with significant uncertainty on trade policies and legitimate concerns about future economic growth.
But there are also positive factors at work that must be considered, including a still-resilient economy and looming positive economic policies such as deregulation and potential tax cut extensions. So, despite depressed investor sentiment, the outlook for the economy and markets is not universally negative.
At Cohen & Son Wealth Management, we have experienced these types of markets before and are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and through both bull and bear markets, we will remain focused on the diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Sincerely,
JONATHAN B. COHEN, AWMA
Managing Director / Branch Manager
California Insurance Lic. #0H35606
Material created by Jon Cohen and Sevens, an independent third party as of April 1, 2025. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Holding investments for the long term does not insure a profitable outcome. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.
Investing involves risk and investors may incur a profit or a loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible. The ICE U.S. Treasury 7-10 Year Bond Index is part of a series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than seven years and less than or equal to ten years. The ICE U.S. Treasury Bond Index Series has an inception date of December 31, 2015. Index history is available back to December 31, 2004.
The Barclays Capital Municipal Bond is an unmanaged index of all investment grade municipal securities with at least 1 year to maturity. The Bloomberg Barclays US Mortgage-Backed Securities (MBS) Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The Bloomberg Barclays U.S. A Corporate Bond Index measures the investment-grade, fixed rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. The LBMA Gold Price and LBMA Silver Price are the global benchmark prices for unallocated gold and silver delivered in London. SS&P GSCI Crude Oil is an index tracking changes in the spot price for crude oil. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
One cannot invest directly in an index. Past Performance does not guarantee future results.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. Bond prices and yields are subject to change based upon market conditions and availability. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.