Q1 2025: Thoughts on the Investment Markets

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
– Aphorism often attributed (probably incorrectly) to Abraham Lincoln.

• Broad economic indicators remained stable in the first quarter, reflecting a continuation of the healthy environment of the past two years.
• Despite the positive economic readings, policy uncertainty has had a measurably negative impact on consumer confidence and market sentiment.
• The U.S. stock market sold off in the first quarter, yet some areas of the market, such as international and value stocks, continued to provide investors with positive performance.
• Bonds were broadly positive in the first quarter as intermediate-term and long-term interest rates declined.

Economic review and outlook

By most measures, the U.S. economy continued its path of steady growth, stable employment and modestly elevated inflation in the first quarter of 2025. Major economic indicators continued to show a strong and stable economy, though confidence about the outlook going forward has begun to wane in response to heightened levels of policy uncertainty and increasing geopolitical tensions. Real GDP grew at an annualized rate of 2.3% in the fourth quarter, bringing full-year GDP growth for 2024 to 2.8%. This marked three consecutive years of strong stable growth in the U.S. economy, following growth rates of 2.9% in 2023 and 2.5% in 2022. Other recent data continued to reflect a stable economic environment. The unemployment rate ticked up to 4.1% in February but remains low by historical standards and has stayed within a narrow range, between 3.7% and 4.2%, since August 2023. Inflation rose 2.8% year-over-year in February, well below its peak of 9.0% in June 2022, yet still stubbornly above the Federal Reserve’s long-term target of 2.0%. Long-term and intermediate-term interest rates edged down in the quarter, while short-term rates remained relatively stable. The 10-year Treasury yield fell from 4.58% at year-end to 4.23% by the end of the first quarter, while the 6-month Treasury yield was relatively unchanged, falling 0.01% from 4.24% to 4.23% at quarter-end.

Despite the stability of broad economic measures, some measures of sentiment are beginning to imply decreasing consumer confidence and increasing levels of uncertainty about the economic outlook.

Economic Policy Uncertainty Index

The volume of policy changes and the speed with which they are being rolled out have unsettled confidence and raised levels of uncertainty. The vagueness of the policies and an ever-changing schedule of implementation have served to amplify the uncertainty surrounding these changes. As an example, the potential for tariffs to constrain economic growth and cause an increase in inflation seems to have particularly unnerved investors. This has been made worse by the lack of details on the scope, magnitude and timing of these tariffs. As we learn more details on policy specifics for tariffs and other policy changes, we may begin to see some recovery in confidence as the path forward becomes a bit clearer.

Stock market review and outlook

Index return data provided by Morningstar Direct and Bloomberg. This information is provided for illustrative purposes only.
Index performance does not reflect fees or expenses that investors typically pay to buy or sell securities.
It is not possible to invest directly in an index.

U.S. stocks declined in the first quarter, likely owing to concern among investors and consumers stemming from policy uncertainty. The S&P 500 Index fell 4.2% in the quarter and the Russell 2000 Index of small-cap stocks fell even further, down 9.5%. The worst-performing sectors were consumer discretionary and information technology stocks, which declined 13.8% and 12.7%, respectively. Despite waning investor sentiment, there were areas of positive performance in equity markets. Value stocks, as measured by the Russell 1000 Value Index, rose 2.1% in the quarter, providing some ballast to diversified stock portfolios. The best-performing sectors in the first quarter were energy and health care, up 10.2% and 6.5%, respectively.

International stocks provided investors with some degree of solace given the selloff in U.S. markets. The MSCI All Country World Index (ex US) was up 5.2% in the quarter. More expansionary, growth-oriented policies around the globe have helped fuel the recent surge in foreign markets. Key drivers of optimism for growth overseas included higher defense spending, Europe’s increasingly expansionary fiscal policy in response to policy changes in the U.S., and continued expansionary policies in China. A weakening U.S. dollar has also provided a tailwind for U.S. investors as profits in foreign currencies can buy more U.S. dollars when returned to U.S.-domiciled investors. Should the U.S. continue its current policy path, it would not be a surprise to see these trends continue. Despite these recent gains, international equities continue to trade at more attractive valuations than U.S. large-cap stocks, adding another reason to view this trend favorably.

Bond market review and outlook

Index return data provided by Morningstar Direct and Bloomberg. This information is provided for illustrative purposes only.
Index performance does not reflect fees or expenses that investors typically pay to buy or sell securities.
It is not possible to invest directly in an index.

Bonds were largely positive in the first quarter, buoyed by falling intermediate-term and long-term interest rates. The Bloomberg U.S. Aggregate Bond Index rose a healthy 2.8% in the quarter, helping diversified portfolios to mitigate the impact of declines in U.S. equity markets. Intermediate-term and long-term interest rates fell in the quarter while short-term rates remained relatively stable. As a consequence of this flattening of the yield curve, the Bloomberg Treasury 1-2 Year Index was up 1.4% in the quarter, while the Bloomberg U.S. Treasury 20+ Years Index returned 4.6%. This resulted in a tendency over the first quarter for similar portfolios with longer durations to outperform those with shorter durations.

In the short term, returns to a bond portfolio can vary depending on changes in interest rates or credit spreads. However, over the long term, bond returns tend to converge toward their starting yield at purchase. Despite the recent decrease in interest rates, bond investors are currently able to invest in bonds with yields higher than they have been in recent years. Higher (rather than lower) starting yields tend to be positive for investors regardless of the future direction of interest rates. If interest rates fall, bond prices should increase, and the combination of high starting yields and rising prices would most likely provide an attractive environment for those holding bonds. On the other hand, should interest rates rise, the income provided by higher starting yields will help to cushion the negative price impact of rising rates and can then be reinvested at the new, higher rates.

Potential portfolio implications

Diversified portfolios, by their nature, are designed to weather a wide range of economic and market conditions. Thus far in 2025, this has again proved to be the case.

• Over time, investing in international stocks has been a way for investors to diversify their exposure to U.S. stocks while widening their investment opportunity set. In recent years, as U.S. stocks have consistently outperformed international stocks, investing internationally has fallen out of favor with some investors. However, in the first quarter as U.S. stocks sold off, international stocks surged forward. This served to boost portfolio returns for investors who have maintained an allocation to international stocks. This divergence in performance between domestic and foreign stocks highlights the importance of strategic portfolio diversification, removing the need to time changes in market regimes.
• The first quarter also highlighted the benefits of fixed income during times of elevated market volatility, as broad bond markets provided positive returns for investors over the period. Investors who remained in cash or short-term bond portfolios did not experience the full benefits that accrued to those investors who held intermediate-term and long-term bonds in their portfolios.
• Market selloffs may provide an opportunity for taxable investors to actively book losses to help offset any current or future capital gains, providing investors with the ability to increase the amount of gains they get to keep. This active tax management can be done both at the portfolio level and within accounts managed specifically for tax efficiency and tax-loss harvesting. The first quarter offered ample opportunities for tax-managed accounts to realize losses that investors can use to offset current or future capital gains.
• Volatile markets may lead to more attractive entry points in areas of the market that may have become expensive, such as large-cap high-quality U.S. stocks. Investors may be able to take advantage of these opportunities by a program of disciplined rebalancing within their investment portfolio. When appropriate for your investment plan, volatility may provide an incremental opportunity to put cash to work at reasonable valuations in areas of the market that had become expensive prior to the market volatility.
• Alternative investments were another way for investors to mitigate the daily volatility that bedeviled public markets in the first quarter, as they are typically not subject to daily mark-to-market price changes. This lack of daily volatility may help reinforce a long-term, strategic mindset for investors during periods of market volatility.

Conclusion

Thus far, 2025 has been a bit of a bumpy ride for investors as policy uncertainty and geopolitical risks have resulted in increasing volatility for investment markets. But this is nothing new. Investors have always had to deal with bouts of heightened volatility and uncertainty. The beginning of spring may not bring the end of policy uncertainty, but once we begin to gain some clarity around policy details and execution, we can hope this will lead to improved sentiment for investors and consumers.

In uncertain times, owning a resilient portfolio combined with a strong financial plan becomes even more important for investors. Thoughtful diversification can help build this resilience into the fabric of portfolios and may provide investors with some protection against uncertain outcomes. To date in 2025, that has certainly been the case as exposures to international stocks, broad fixed income markets and alternative investments have helped to buffer the volatility experienced in U.S. equity markets.

When dealing with difficult tasks, the difference between success and failure often comes down to having the right process, using the right tools and spending adequate time in preparation. Chopping down a tree is much easier with a sharp blade rather than a dull one. Making the effort to ensure you have the proper tool for the job at hand is typically time and effort well spent. And spending the time beforehand ensuring your plan and portfolio are prepared for dealing with market volatility may help when challenging markets and economic conditions arise. If you have any questions about your financial plan or the positioning of your investment portfolio given the shifting geopolitical and macroeconomic environment, please contact your Corient Wealth Advisor.

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The indices presented herein are not actively managed. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Certain portfolio or fund performance may not be comparable to the performance of these indices. It is not possible to invest directly in an index. Unless otherwise noted, index returns within this presentation have been adjusted for the reinvestment of dividends (total return), and foreign index returns reflect the withholding of taxes on dividends (net return). Those foreign indexes denoted as “GR” do not reflect the withholding of taxes on dividends.

It should not be assumed that your Corient account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Corient accounts; and (3) a description of each comparative benchmark/index is provided below.

The S&P 500 Index measures the performance of the large-cap segment of the market. The index is considered to be a proxy of the U.S. equity market.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index, representing approximately 8% of the latter index’s total market capitalization. The Russell 2000 includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI All Country World Index (ACWI) is a global stock index that encompasses nearly 3,000 companies from 23 developed countries and 25 emerging markets. It is used as a benchmark for global equity funds and asset allocation.

The MSCI Emerging Markets Index captures large- and mid-cap representation across emerging markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).

The Bloomberg Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.

The Bloomberg U.S. High Yield Index covers the universe of fixed-rate, non-investment-grade debt.  Eurobonds and debt issues from countries designated as emerging markets are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.

The Russell 2000 Index measures the performance of the small cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

NASDAQ 100 is a globally recognized index that tracks the performance of 100 of the largest non-financial companies listed  on the Nasdaq Stock Market®, encompassing a diverse range of industries and sectors.