George Hosfield, CFA
Chief Investment Officer
Director
After a quick start that saw the S&P 500 jump 5% in the first three weeks of the year, markets abruptly reversed course and gave it all back and then some, with the blue-chip index posting a 4.3% loss for the quarter. Market action through the first three months of the year affords an opportunity to reprise the first of five lessons to successful investing that we shared in our 2025 capital market outlook: “Turn down the volume.” By this we mean, it is imperative that investors endeavor to remove emotion and separate the signal from the noise when digesting market, economic and political news. Doing so, is proving to be a challenge, as can be seen from the accompanying “Economic Uncertainty Index” (which admittedly is heavily influenced by media headline data.) Incredulously, it has now reached the same level it did during peak COVID.
The current investment landscape has been dominated by noise and rhetoric surrounding tariffs. Understandably, one of the primary reasons for soaring investor anxiety is the prolonged uncertainty as to which tariff policy will ultimately be enacted.
This uncertainty has created a vacuum that emotions have rushed to fill, serving to impair objective economic analysis. To that point, the 10% pullback in the S&P 500 in March occurred at a time when the underlying economic fundamentals had remained largely unchanged. This disconnect highlights how sentiment, rather than fundamentals, can drive market behavior in the short term. From our vantage point, the economic backdrop we’ve observed throughout the year continues to show resilience, and it remains our expectation that key variables such as unemployment, inflation, GDP growth and interest rates will likely end 2025 near their current levels.
While the economic impact of tariffs is certainly not positive, we believe the damage to GDP growth, corporate earnings and the rate of inflation will be materially lower than people have been led to believe. Our full-year expectation is for GDP growth of 1.5% and inflation of around 3% for 2025. This relative stability in economic conditions stands in stark contrast to the volatility we’re currently seeing in market sentiment.
Though market corrections are unsettling, it’s worth remembering that market declines occur in even the healthiest bull markets. Since March 2009, we’ve experienced 30 corrections of 5% or more. These periodic resets are normal behaviors of markets and not necessarily harbingers of a protracted
bear market.
Supported by a healthy labor market with an unemployment rate of 4% and layoffs at very low levels, we do not foresee a recession in 2025. This foundation of employment stability provides crucial support for consumer spending, which remains a key driver of economic growth.
At Ferguson Wellman, we are committed to diversified portfolios designed to weather various market conditions. One benefit of the current environment is that bonds are appreciating in value, helping to offset stock price declines. With bonds offering attractive yields near 5%, they continue to play an important role in balanced portfolios.
We are closely monitoring both the implementation and magnitude of tariffs for any outsized negative impact on corporate earnings or economic vitality. That said, we believe that much of the negative sentiment is already priced into current market valuations. Furthermore, after two years of equity returns exceeding earnings growth, the recent pullback has provided a healthy reduction in market multiples and increased market breadth. Despite recent volatility, we are maintaining our overweight to large-cap U.S. equities while continuing to underweight both small-cap and international stocks. Our neutral weighting in fixed income reflects the attractive yields available in this asset class.
Though confident in our current positioning, we are not complacent and we continuously monitor a host of objective economic indicators for signs that would warrant a modification to our prevailing market thesis. To that end, three of the timeliest indicators we follow are (1) weekly unemployment claims (2) corporate earnings revisions and (3) yield spreads between U.S. Treasury and corporate bonds, which is a real time measure of investors’ appetite for risk.
As we’ve learned over our firm’s 50-year history, sometimes the hardest thing to do is nothing. This lesson seems particularly apt in the current environment, where patience and the ability to turn down the volume on market noise and focus on fundamentals are essential to attaining one’s long-term financial goals.