2025 Q2 Newsletter
The first quarter of 2025 is already in the books. January started rather strong then faded into losses to end the quarter driven by market and economic uncertainty. Over thousands of years, humans have rightly developed defense mechanisms to protect us. One defense mechanism is, ‘In a lack of knowledge, we always think of the worst outcome’. ‘My child is not home on time, there must have been an accident’! ‘I have not received a reply to a text, how did I offend my friend’? You can think of more examples.
Love it or hate it, the new administration is making sweeping changes in government and tax policy. This is creating optimism for some and anxiety for others. Our defense mechanisms are high. There is wisdom in simply recognizing anxiety is normal during times of change.
When we step back and look at investing over the long run, we find that the mathematics of volatility looks the same no matter what the cause. Our risk allocation models are A-political, we have removed as much bias as possible. Our models don’t care why the market moves, but that it moves and how far it moves. While we certainly have market opinions (read the rest of this letter), our investment models aren’t dependent on them.
Navigate Private Wealth - Risk Allocation models are reactive. This means we don’t adjust risk until after markets have risen or fallen substantially. Once the markets have moved enough to make adjustments, we don’t hesitate. Disciplined use of this philosophy has proven to be very valuable to clients no matter why the uncertainty.
2025 1st Quarter Review
Our forecast for the first quarter was quite accurate, ‘early-year volatility could arise from shifting investor sentiment, particularly in light of geopolitical uncertainties and debates over the economy’s trajectory’. New ideas on taxation and cost cutting to decrease the $2,000,000,000,000 (trillion) deficit and $36,000,000,000,000 (trillion) national debt are creating uncertainty as discussed above.
2025 2nd Quarter Preview
What could happen in the second quarter is difficult to forecast. The easiest prediction is fixed income. The federal lending rate is unlikely to change. We don’t anticipate easing until the second half of the year meaning a fairly steady bond market.
Stocks are less predictable. There is a good chance we have seen the extent of the market drop, but we could also see a new round of skepticism. Stocks are still a bit overpriced as we discuss in the US Stocks section below.
Bonds
The bond market was consistent for the first quarter. The Federal Lending rate did not change after getting ahead of the curve in the 4th quarter of 2024. Market rates drifted down slightly, which could continue through the second and maybe third quarters. The decrease in market lending rates helped bond prices offset stock losses.
AGG- Aggregate Bond Index v IVV – S&P 500 ETF January 1st – March 31st
30yr Mortgage Rates v Federal Lending Rates: August 1, 2024-January 31, 2025, First Quarter 2025
US Stocks
The stock market has been volatile for the past 6 weeks (refer to the graph in the Bond section). While most of the media has been focused on the new administration and the sweeping changes they have made and anticipate making, we remain focused on economic fundamentals. One of the most important fundamentals is Price to Earnings (P/E ratio). P/E ratio measures how expensive stocks are relative to earnings. The S&P 500 P/E ratio is high. Remember, the S&P 500 earned 25% last year. That rate of growth is simply unsustainable. While PE ratios did not reach our warning levels based on historical pricing, either profits need to increase or stock prices need to decrease. The trigger this time is tariffs. If it wasn’t tariffs, it would be something else, same result, different cause.
iShare S&P 500 ETF (IVV) Price to Earnings Ration over past 10 years. Dated April 1, 2025
International
We have not seen evidence to buy international stocks for several years. However, we have kept a small amount in our moderately aggressive and aggressive models. The rationale for keeping at least some paid off during the first quarter. The graph below shows our international fund compared to our S&P 500 ETF. Our new models increase international holdings slightly.
Goldman Sachs Int Opp (GSIMX) v iShare S&P 500 ETF (IVV)
Did You Know?
We have professionally managed money through many down markets since 1991. The dot-com bubble and Y2K crisis leading to the recession of 2000-2002. The financial crisis of 2008. The COVID19 pandemic that leading to a mid-year market declines of 33% in 2020 and 40% in 2022. Plus many other market corrections. Not only is market volatility normal, our models are built for it.
The graph below shows market losses mid-year and at year-end since 2000. Only 6 years since 2000 has the market lost money and 3 of them were in 2000-2003. Half of those years the market has had mid-year double digit losses. Navigate Private Wealth has developed portfolio models to take advantage of market declines. These models take emotion out of investing and rely on mathematics to make rational decisions.
