VWG Wealth Management 2025 1st Quarter Review

By VWG Wealth Management on April 2, 2025

Executive Summary

• After reaching an all-time high on February 19, U.S. stocks sharply reversed, declining 10.1% in just 16 days.  The S&P 500 index fell 4.3% in the quarter.  Smaller U.S. stocks as referenced by the Russell 2000 Index, dropped 9.5%.
• Catalysts for the decline included high levels of optimism and positive positioning at the quarter’s onset, which were followed by a relentless series of new aggressive policies and proposals coming from the incoming Trump administration.
• Consumer and investor confidence has plummeted.  Although concerning, declining “soft” economic data including sentiment and surveys does not necessarily lead to commensurate changes in “hard” economic data that includes employment, consumer spending and inflation.  The U.S. economy is firm but is slowing from the high levels of 2023 and 2024. 
• 10% stock market declines are not unusual, they occur roughly once every 12 to 18 months.  Negative sentiment is counterintuitively positive for long-term investors.  Corporate credit spreads have not widened appreciably, countering fears arising from “soft data.”  Many experts do not see present economic conditions and sentiment pointing to a worse downturn.
• VWG remains positive on many public and private strategies, managers and entrepreneurs.  We and many government leaders, economists and strategists, acknowledge that economic and global macro conditions and expectations have changed to being unusually uncertain.  The incoming administration is attempting a significant reset of our annual Federal deficit spending and our economy’s unsustainable level of reliance on government spending.  Some corporations and industry sectors may experience slowing earnings growth.  Periods of volatility should be expected. 
• VWG recommends diversified, balanced portfolios.  Investors should maintain, and in some cases even increase, their allocations to cash and quality, liquid short-term instruments.
• As always, thoughtful financial planning and reviews should drive portfolio allocations and investment decisions. 

Review of the Markets

Investor sentiment and their actions made a dramatic reversal during the 1^st quarter.  After reaching an all-time high on February 19, the S&P 500 index declined 10.1% in just 16 days.  It was the seventh-fastest 10% correction for the broader U.S. stock market since 1950.  March’s Bank of America Global Fund Manager Survey reported its most significant pullback in sentiment since March 2020, the onset of the COVID-19 pandemic.  Economists and market strategists at Goldman Sachs, Morgan Stanley, Bank of America, Charles Schwab, and many others, cut their expectations for 2025 U.S. economic growth and tempered their target returns for the U.S. stock market.

For the full quarter, the S&P 500 Index, a benchmark for large U.S. stocks, dropped 4.3%.  Smaller U.S. stocks, referenced by the Russell 2000 Index, fell 9.5%.

How did such robust optimism and positive expectations for continuing “U.S. Exceptionalism” unravel so quickly?  Looking back to the end of last year, a confluence of conditions had developed that set the stage for a potential correction.  We discussed these in our 4^th Quarter and 2024 Year End letter.  Valuations of large U.S. stocks were stretched after successive 20%+ gains in the S&P 500.  U.S. households were holding a near-record share of their assets in equities.  U.S. economic growth had vastly passed projections in 2023 and 2024.  Expectations for continued growth and ‘animal spirits’ this year were fanned by the election of pro-growth and pro-business President Trump.

Additionally, the percentage of ownership of U.S. stocks by foreign investors and sovereigns had reached very high and possibly unsustainable levels.  U.S. stocks made up 66% of the capitalization of all global stocks at the end of 2024.  Understandably, a large driver of this was unprecedented 10-year earnings and cash flow growth of the “Big 5” mega-cap hyperscalers.  

Optimism has quickly waned.  A relentless and chaotic flurry of new policies and abrupt actions have been unleashed by the administration since President Trump’s January 20 inauguration.  These include aggressive tariff proposals, threatening stances towards the U.S.’s close trading partners Canada and Mexico, possible large-scale deportations and tighter immigration controls, and swift termination of tens of thousands federal workers driven by the Department of Government Efficiency (DOGE).  Executive orders have temporarily reduced or suspended funding to some foreign-aid programs, certain educational, research, climate and sustainability projects.  In short, a great deal of abnormally high uncertainty has surged – about the U.S. economic policy, the future path of growth, inflation and unemployment, and potential interrelated effects on the global economy and geopolitical order.

In response, consumer expectations for the future have greatly diminished.  Torsten Slok, Apollo Chief Economist, wrote that “after peaking back in mid-November, March’s University of Michigan survey of consumer sentiment deteriorated at an alarming rate in both high and lower wage- earning segments.  Consumer worries about losing their jobs have now risen to recessionary levels.¹”  Renaissance Macro Research Head of U.S. Economics Neil Dutta observed that “many U.S. citizens and market participants assumed (in their initial optimism) that with President Trump they would be getting tax cuts, deregulation, and tariffs.  The problem is that they thought they would be getting these in that order.²”

The U.S. economy has already been moderating over the past 6 months, from very strong levels.  The labor market, while still robust, has shown signs of cooling. Inflation has been sticky, forcing monetary policy and interest rates to remain tighter.  This has contributed to elevated housing affordability. Consumer spending has been resilient.

Economic uncertainty created by new and proposed executive actions could add additional downward pressure.  Esteemed macro strategist James Aitken recently stated that “there is no escaping the fact that when you estimate the cumulative impact of DOGE cuts, tariff uncertainty, reduced immigration, and the more qualitative things including the impact to capital expenditures and consumer spending, expected nominal U.S. GDP is lower.³”

Significantly diverging from the U.S. markets, international stocks outperformed in the 1^st quarter.  Signals for potential rebounds in the soft economies of China and Germany were encouraging.  Some stock and bond asset flows appeared to reverse out of the U.S.  The MSCI World ex-US index gained 6.3%.  The MSCI Emerging Markets Index increased 4.5%

Peculiarly, interest rates remained relatively stable in the 1^st quarter despite the stock market correction and pullback in economic expectations and sentiment.  Some measures of inflation appeared to be sticky.  The yield of the U.S. 10-year Treasury billed ended the quarter at 4.2%.  The Bloomberg U.S. Aggregate Bond Index earned a 2.7% total return.  Displaying corporate financial stability, credit spreads remained firm.  The Bloomberg Barclays High Yield Bond Index edged 0.9% higher.

In response to threatened tariffs and uncertain U.S. global policies, the U.S. dollar markedly weakened against a basket of foreign currencies.  The ICE U.S. dollar index fell 3.9%.   Reflecting the dollar decline and a possible flight to safety, gold continued higher.  The NYMEX Gold continuous futures contract rose 19.3% in the quarter. 

Current Economic and Market Conditions

10% stock market corrections are not rare.  Especially when coming from all-time market highs, they do not by themselves signal anything particular or ominous.  10% is the median calendar year market drawdown since 1980.

Renaissance Macro’s Chairman and Head of Technical Research says that “so far, all of our indicators do not show this to be the beginning of something bigger.  We are comforted by the negative sentiment, and by credit spreads which have not shown degradation.⁴”

The U.S. economy is still firm.  In March’s post-FOMC press conference, Chairman Powell emphasized that “hard data” – tangible, measurable indicators such as unemployment rates, job growth, consumer spending, and inflation figures – are “pretty solid.”  He pointed out that while the Fed is concerned about deteriorating “soft data,” that includes sentiment-based surveys including consumer confidence and purchasing managers indices (PMIs), these don’t always lead to changes in “hard” data. 

Portfolio Positioning

Policy and economic uncertainty have quickly risen to abnormally high levels.  The economy is slowing, and we do not know the potential “knock-on” effects – from tariffs, government spending cuts, and consumer and investor behavior –  on savings, capital expenditures, future growth, and responses from international companies and governments.  Chairman Powell described the current economic uncertainty as “remarkably high, making it difficult to make reliable forecasts of economic outcomes.”

Some of these aggressive policy actions are perhaps necessary and overdue.  The annual federal deficit has grown to an alarming level, particularly during the past four years of solid growth.  Treasury Secretary Scott Bessent has suggested that our economy has become “hooked” on government spending, requiring a “detox” period to transition toward a more sustainable economic equilibrium.  This will require some heavy lifting and increasing focus on “Main Street as opposed to Wall Street.” He recently elaborated that the big-picture goal is to reduce the current 7% annual spending deficit to a more manageable 3% over the next four years⁵. 

Patience and tolerance of periodic volatility will likely be required to weather a slowing economy, pockets of slower earnings growth, and transformative changes.  James Aitken explains “if U.S. GDP grows much slower than expected, then the prices of stocks must be lower and credit spreads must widen.  We must then be in a more difficult period of adjustment for risk assets.  It is a natural adjustment.  And given a hyper-financialized system, particularly in the U.S., it could be a bumpy couple of quarters.⁶”   This does not imply that VWG’s long-term investment stance has changed.  We remain optimistic, and we continue to find long-term value in many public and private managers, strategies and entrepreneurs.

Investing always entails dealing with uncertainty about the present, and the future.  The global macroeconomic system and financial markets are complex adaptive systems, whose changing inputs lead to rarely discernable second- and third-order effects.  Counterintuitively, risk is higher when the majority conclude that the skies are bright, and the future is certain.  As Warren Buffett stated in his 2004 Berkshire Hathaway shareholder letter, “Be fearful when others are greedy, and be greedy when others are fearful.  And most certainly, fear a cheery consensus.  You pay a very high price in the stock market for a cheery consensus.”

Periods of heightened uncertainty demand that investors hold diversified, balanced portfolios.  These should contain assets and strategies that can:

• benefit from continuing growth and optimism
• withstand and even benefit from some inflation
• generate consistent cash flows under varying economic conditions
• withstand volatility
• offer liquidity and capital preservation

Financial planning aways comes before strategizing the portfolio and the placement of specific investments.  If you have heightened concerns about your current situation, or if your future needs and goals have changed, please communicate these to your wealth advisor.  To help manage any concerns or fears arising from the chaotic actions, proposals, and news flow coming from the new administration, we highly suggest stepping away from the incessant media stream.  Reclaim some personal time and space, and explore ways to find peace, mindfulness and personal empowerment.  As spring nears, getting outside, taking a walk, reading a great novel, getting some exercise, are all great ways to detach.  Your VWG advisor can help you with some specific recommendations.

The VWG team is relentlessly monitoring market and economic conditions.  We will inform you should any of our thoughts on long-term positioning and strategy change.  We thank you for your trust.  We give you our deep commitment that we will continue working hard to earn it.

Regards,

VWG Wealth Management

Suzanne, Ashley, Rashmi, Kay, Brandi, Lynette, Michelle, Lilly, Ryan, Ryan, Ryan, Justin, Jack, Elana, John, Rick and Jeff

* All stated index returns are as of 3/31/2025 unless otherwise indicated.

* Index Data and Charts sourced from FactSet Research, Morningstar, Bloomberg, U.S. Federal Reserve of St. Louis, Goldman Sachs Global Investment Research, University of Michigan, Apollo Chief Economist, Macrobond, Policyuncertainty.com, LSEG, Haver Analytics, Financial Times.

Footnotes:

1. Apollo Academy “The Daily Spark” blog post, March 16, 2025.
2. RenMac Off-Script podcast, March 14, 2025.
3. On the Tape with Danny Moses podcast, March 12, 2025.
4. RenMac Off-Script podcast, March 14, 2025.
5. All-In podcast, March 18, 2025.
6. On the Tape with Danny Moses podcast, March 12, 2025.

VWG Wealth Management is a team of investment professionals registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC.  Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

The information provided has been obtained from sources not associated with Hightower or its associates. All data and other information referenced herein are from sources believed to be reliable, although its accuracy or completeness cannot be guaranteed. Any opinions, news, research, analyses, prices, or other information contained in this report is provided as general market commentary, it does not constitute investment advice. VWG Wealth Management and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

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This document was created for informational purposes only; the opinions expressed are solely those of VWG Wealth Management, and do not represent those of Hightower Advisors, LLC, or any of its affiliates.