Q2 2025 | Quarterly Newsletter
- Spectrum Investment Advisors
- Apr 3
- 7 min read
Newsletter Snapshot:
A volatile first quarter saw U.S. stocks retreat while international stocks produced positive returns
Tariffs hit faster than expected - markets digest policy shift
Bonds provided positive returns and were a ballast in diversified portfolios
Written by:
Following two consecutive years of generally strong U.S. Equity returns, U.S. equities were volatile to start 2025. The first quarter brought positive returns in January, while a pullback in February and March pushed the S&P 500 into correction territory for the first time since July 2023. The S&P 500 ended the quarter down 4.27%. International stocks rose 6.86% (MSCI EAFE Index) and the Bloomberg U.S. Aggregate Bond Index rose 2.78%.
A sample portfolio with 60% stocks and 40% bonds diversified across these three indices produced a positive return of 0.55% in the first quarter.
Five things to know about markets and tariffs
President Trump's new tariffs came sooner and at higher levels than most expected.
Tariffs are generally thought to increase inflation and slow growth, which are both headwinds for stocks.
"Art of the deal": We don't yet know if or when the tariffs announced April 2 will be negotiated lower.
Diversification has helped in 2025 as bonds have provided a cushion for investors in balanced portfolio.
Market rebounds can happen quickly. We recommend staying diversified and avoid trying to time the market.
The chart below shows a few examples of recent downturns. The "trade-war" of 2018 saw two negative quarters during President Trump's first term. March of 2020, the entire economy came to a temporary halt during the onset of COVID-19. 2022 saw three consecutive quarters of declines as the Federal Reserve raised interest rates to cool inflation. In spite of the downturns, the annualized total return since 2015 is 12.3%. Think long-term.
U.S. and International Equities
The "Magnificent 7" stocks rose 48% in 2024, providing a big boost to overall U.S. returns. As the chart to the right shows, the tech heavy "Magnificent 7" are acting as a headwind in 2025. Another trend that has reversed so far is the U.S. dollar. Dollar strength was a major headwind for international stocks in 2024. The U.S. dollar has weakened and returns have been quite favorable overseas. The dollar weakness was driven by a number of factors: weaker growth prospects in the U.S. while other countries announced plans to implement expansionary fiscal policies in an attempt to boost economic activity abroad, which was viewed as a net positive for foreign growth.
Economy: 2-0-2-4 Forecast Runs Into "Policy Fog"
Coming into 2025, it looked like we might see a repeat of 2024 economic conditions: 2% GDP economic growth with no recession, near 2% inflation and 4% unemployment rate. Policy uncertainty was a key risk to that outlook, particularly around tariffs. The level of tariffs announced was much higher than expected. Original consensus estimates put 12% overall tariffs near the high end of forecasts. The tariffs announced on April 2 are twice that amount at an estimated 24%.
The chart to the right shows the average tariff rate on U.S. imports since 1900. The blue line shows the historical tariff rate in the U.S. The red dot identifies the average tariff rate that is scheduled to go into effect on April 5 and 9. Tariffs may be used for negotiation and subject to change, but ultimately they appear likely to remain at levels we have not seen for over 75 years.
Dr. David Kelly, Chief Market Strategist at JPMorgan now sees GDP growth near 0% with increased risk of a mild recession. He expects inflation near 4% by year end. Two positives are the possibility for negotiated lower tariffs and potential stimulus, particularly in the back half of 2025 and into 2026.
Markets also received some relief at the March Federal Open Market Committee (FOMC) meeting in March when Federal Reserve projections showed they still expected two rate cuts in 2025 in spite of slightly higher inflation.
Something to keep an eye on is the impact to consumers, who are in a weaker position compared to recent years as shown by higher delinquency rates on the chart to the right. Student loan delinquencies in particular are expected to jump as COVID-related relief has ended.
Fixed Income
Fixed income markets provided a welcome source of stability and positive returns during the first quarter. As growth concerns re-emerged and fiscal policy tightened, Treasury yields declined, pushing bond prices higher. Income from bonds also added to returns for the quarter. The Bloomberg U.S. Aggregate Bond Index returned 2.78% for the quarter.
Defaults are expected to remain low this year as companies continue to manage their balance sheets well. Looking forward, fixed income should continue to help balance, diversify, and provide stability in one's investment portfolio.
Conclusion
Market gyrations are normal as the legendary investor Peter Lynch has said, “You need to know the market’s going to go down sometimes.” Market corrections are inevitable, but they shouldn’t shake a long-term investor’s confidence. While short-term volatility can feel unsettling, history shows that long-term discipline and diversification remain the most reliable path to compounding wealth.
The chart below demonstrates this concept very well. The red dots indicate the market declines in each of the respective years. The gray bars show the return that was produced for the year. In every year since 1980 we have had some form of a pullback, but eventually, markets recover.
Understanding how your portfolio is allocated helps when markets or the economy become challenging. We are here to provide guidance and advice specific to your situation and circumstances.
In closing, we always encourage investors to think long-term. The chart to the left shows most categories are still up over the last three years despite the downturn in 2022 and so far in 2025. For those of you who wish to revisit your portfolio, please contact us at 800-242-4735. For more on the markets, click on the resources tab on our website www.spectruminvestor.com.
Spectrum Investment Advisors 6329 W. Mequon Road Mequon, WI 53092 262-238-4010 | www.spectruminvestor.com
Data as of 3/31/25 unless otherwise noted. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. Barrel of Oil: West Texas Intermediate. Inflation Rate: CPI. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indices cannot be invested into directly.
To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Benchmark Disclosures: Morningstar Category Averages: Morningstar classifies mutual funds into peer groups based on their holdings. The Category Average calculates the average return of mutual funds that fall within the category during the given time period. The following indexes and their definitions provide an approximate description of the type of investments held by mutual funds in each respective Morningstar Category. One cannot invest directly in an index or category average. Index returns do not reflect trading, advisory and other fees and expenses which are incurred in your actual investment accounts and would reduce your returns. Intermediate-Term Bonds: Bloomberg US Agg Bond Index–Measures the performance of investment grade, US dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS, ABS and CMBS. Allocation 50%-70% Equity–These funds invest in both stocks and bonds and maintain a relatively higher position in stocks. These funds typically have 50%-70% of assets in equities and the remainder in fixed income and cash. Large Cap Value: S&P 500 Value Index–Measures the performance of value stocks of the S&P 500 index by dividing into growth and value segments by using three factors: sales growth, the ratio of earnings change to price and momentum. Large Cap Blend: S&P 500 Index–A market capitalization-weighted index composed of the 500 most widely held stocks whose assets and/or revenue are based in the US. Large Cap Growth: S&P 500 Growth Index–Measures the performance of growth stocks drawn from the S&P 500 index by dividing it into growth and value segments by using three factors: sales growth, the ratio of earnings change to price and momentum. Mid Cap Value/Mid Cap Growth: S&P MidCap 400 Index–A market cap weighted index that covers the complete market cap for the S&P 400 Index. All S&P 400 index stocks are represented in both and/or each Growth and Value index. Mid Cap Blend: S&P MidCap 400 Index–Measures the performance of mid-sized US companies, reflecting the distinctive risk and return characteristics of this market segment. Small Cap Value: Russell 2000 Value Index–Measures the performance of small-cap value segment of Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Small Cap Blend: Russell 2000 Index–Measures the performance of the small-cap segment of the US equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Foreign Large Cap Blend: MSCI EAFE NR Index–This Europe, Australasia, and Far East index is a market-capitalization-weighted index of 21 non-US, developed country indexes. Small Cap Growth: Russell 2000 Growth Index–Measures the performance of small-cap growth segment of Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values. Real Estate: DJ US Select REIT Index–Measures the performance of publicly traded real estate trusts (REITs) and REIT-like securities to serve as proxy for direct real estate investment. Natural Resources: S&P North American Natural Resources Index– Measures the performance of US traded securities classified by the Global Industry Classification Standard (GICS) as energy and materials excluding the chemicals industry and steel but including energy companies, forestry services, producers of pulp and paper and plantations. Past performance is no guarantee of future results. This report is for informational purposes only and should not be construed as a recommendation or solicitation to buy or sell any security, policy or investment. PE Ratio is the measure of the share price relative to the annual net income earned by the firm per share.
