Quarterly Review and Outlook - April 2025

Dear Clients and Friends,

As last week’s rain and wind cut short the peak cherry blossom season in the DC Tidal Basin, we were reminded that markets, like the seasons, move in cycles—some predictable, some unpredictable, and many shaped by forces beyond our immediate control. The past quarter was no exception, with a seemingly non-stop barrage of proposed policy changes from the White House leading to consternation in the financial market.

More recently, the past week saw global equity markets voice disapproval with President Trump's tariff announcements, as stock market declines suggested a large-scale global trade war may negatively impact corporate earnings and consumer spending. With the consumer representing as much as 70% of overall US GDP, their health is paramount for continued economic expansion. Moreover, the uncertainty caused by these tariffs may lead corporate CEOs to cut capital expenditures and potentially reduce employee headcount, further dampening economic activity.

The Trump administration’s stated policy goal is bringing more jobs and higher tax revenue to the U.S., with trade negotiations and tariffs key to achieving that goal. Indeed, the country’s trade imbalance with other countries reached $1.2 trillion last year, according to PBS,[1] with at least part of that gap potentially attributable to protectionist trade policies, tariffs and other taxes on U.S. goods. PBS goes on to state that some economists believe the trade deficit should be reduced to ensure the country’s long-term economic viability.

However, tariffs, by their very nature, have a direct and, in most cases, immediate impact on costs, making imported goods and raw materials more expensive. The result is likely higher inflation in the very near term, even as a possible reduction in corporate and consumer spending may lead to lower economic growth. Reflecting these concerns, many Wall Street investment banks have increased their recession odds in the past few days.[2]

As we reflect on recent market developments, we believe it’s essential to keep in mind a core investing principle: the long-term rewards of staying the course despite short-term noise and uncertainty.

Wherever there is judgment, there is noise – and more of it than you think. 

When we make investment decisions, we rely on judgment—judgment about the economy, corporate earnings, interest rates, geopolitical risks, and even investor sentiment. But as Kahneman and his co-authors point out, judgment is inherently noisy. In investing, this noise manifests in conflicting opinions, stock market turbulence, and ongoing responses to the ever-changing news cycle.

One simple example of this is how investors perceive the value of a dollar. A dollar, at face value, is always a dollar, but its purchasing power can diminish due to factors like inflation or tariffs that drive up consumer goods prices, making everyday essentials more expensive and the dollar feel less valuable. Similarly, the future value of a dollar invested in the stock market is also a judgment call, one currently clouded by short-term noise about a potential trade war, US government indebtedness, and declining investor sentiment, but (hopefully) clarified over time by fundamental growth in corporate earnings.

Uncertainty and the Emotional Rollercoaster

Uncertainty, fueled by noise, can breed fear, anxiety, and reactionary decisions. It often leads investors to exit the market in moments of doubt, just as optimism leads others to pile in when prices are soaring. This cycle of fear and greed is well documented—CNN even publishes a Fear and Greed Index, which looks particularly fearful at the time of this writing[3] —yet it remains one of the biggest challenges to disciplined investing. Our own personal biases, often exacerbated by noise from our news feeds, our peers, our friends and families, can further magnify such challenges.

In most areas of life, we welcome sales—whether on groceries, cars, clothing, or electronics. Yet, when stocks go on sale (what we might call a “correction”—a market decline of 10% or more), many investors become frightened rather than see it as an opportunity. Stock market corrections have occurred roughly every other year over the past four decades, yet annual returns for the S&P 500 were positive in more than 80% of calendar years over the same time period.[4] Rather than fearing market downturns, long-term investors should embrace them as moments to acquire quality assets at a discount. Or, as famed investor Warren Buffet once said, “Be fearful when others are greedy, and greedy only when others are fearful.”[5]

With that in mind, we note that US stock indices have now dipped into “correction” territory, falling from January’s all-time highs which came after two solid years of stock market growth. We believe the market’s recent ups-and-downs are not necessarily a rejection of long-term growth potential but rather an acknowledgment that forecasting the future carries more uncertainty than many investors thought it did just a few weeks ago. With greater uncertainty (more noise) comes greater potential for error in valuation, which, in turn, often leads to the volatile price swings we have recently experienced.

Global Economic Risks and Opportunities

Geopolitical events, such as trade tensions or regional conflicts, add another layer of complexity to market predictions. This uncertainty can lead to declining confidence among corporate CEOs, who may become more cautious with their capital expenditures and future outlooks. As earnings reporting season gets underway over the next few weeks, we expect tariffs, trade, and fiscal uncertainty to be the topics du jour, potentially continuing the spate of market volatility.

However, especially in turbulent times, we believe high-quality stocks—those with above-average profit margins and strong balance sheets—tend to be better positioned to weather economic uncertainty. Such companies form the basis for our equity holdings, both for clients who prefer individual stocks and for those invested in passive index funds where the largest, most profitable companies have the greatest representation.

The Rewards of Staying the Course

History has shown that those who stay invested through market fluctuations are rewarded over the long run. For instance, following extreme market downturns such as 2008 or the COVID-19 crash, the market eventually recovered and reached new highs, underscoring the resilience of long-term investing. Even sitting on the sidelines waiting for things to calm down can be surprisingly costly. In fact, missing just the 10 best performing days in the stock market over the last 30 years would have reduced returns by more than 50%.[6] Staying invested in accordance with your long-term financial goals, regardless of short-term fluctuations, is critical to capturing the full growth potential of the market.

As we look ahead, we encourage you to remain focused on your long-term objectives. A well-diversified portfolio can help reduce exposure to specific risks while positioning you to benefit from growth across different asset classes. In fixed income, for example, we remain focused on high quality short- to intermediate-term US Treasuries, as longer-maturity bonds may see higher volatility should tariff-induced inflation persist. Over the remainder of the year, as uncertainty eases regarding trade and fiscal spending policies, we are cautiously optimistic that U.S. equities can resume their upward trajectory, driven by slower but potentially still positive U.S. GDP growth.

Moreover, staying the course doesn’t mean not being active. Volatility may provide opportunity for portfolio rebalancing, sometimes referred to by the classic phrase, “buy low, sell high,” which is a critical component of our portfolio management process. Tax-loss harvesting, as part of that rebalancing process, can help offset future capital gains, potentially reducing investment-related taxes. Being prepared for market swings—whether expected or unexpected—is key to avoiding reactionary emotional decisions that could impact your long-term financial success.

We appreciate your trust and remain committed to guiding you through all market conditions. If you have any questions about how proposed policy shifts may affect your portfolio, we’re always here to help. Reach out to your Evermay advisor to discuss how we are keeping your financial strategy on track.

Sincerely yours,

Mitch Schlesinger
Chief Investment Strategist