Q1 2025 Investment Update (Tariff policy hits markets)
Q1 2025 Investment Update
2025 started well for stocks but turned down in March. During that time we saw a “correction” (defined as a 10% decline) in our stock markets. Corrections are common and occur almost every year, in fact we had one last summer. Based on market analysis we had expected a correction this year, so we were not taken by surprise.1
Generally, corrections turn into bear markets (defined by a 20% or greater decline) when associated with a recession or an event, for example a crisis or financial bubble popping.2
After tariffs were formally announced the market turned from a correction into what technically could be a called bear market in three days (leading many to surmise the tariff policy was more than expected). The market seemingly priced in the risk (or reality) of recession.
Its important to note the market doesn’t always forecast a recession accurately (both in occurrence and timing) nor does it mean one is imminent.
Since the tariff announcement, we are seeing positive developments in both market action and policy. However we do remain very cautious.
What’s next?
We invest with the foresight of knowing there will be risks and times of corrections and bear markets. For long term results we believe the best defense in a bear market is to stay diversified.
Your returns can suffer if you are out of stocks during the best days in the market. Those best days often occur during volatile times (for example after stocks dropped following the tariff announcement on April 9th the S&P 500 stock index rose 9.5% in one day3). Further, other investment categories in a diversified portfolio, like short-term bonds and international, can help offset declines.
While remaining diversified, we try to add at lower prices by trimming profits. We believe rebalancing is a tried and true strategy.
Then we’ll continue to monitor and wait for a recovery. The market has a good track record, historically its recovered 100% of the time.
History doesn’t repeat itself but it rhymes. Whether it’s a currency crisis, banking crisis, tech bubble, housing bubble, financial crisis or now tariff policy. Even though the circumstances surrounding bear markets are “different this time” drawing from history we have a good roadmap on how it unfolds and will end.
We might see some further declines but its possible the current bottom holds. In the past we have seen a turnaround within about a year’s time with then better markets and returns ahead. Just like in past times, we see no reason that this it’s different this time in the sense that things are irreparable or the market cannot come back.
Despite the negativity we see silver linings.
The Federal Reserve is signaling a wait and see but we think they will come to the rescue if needed in the form of “market operations” or rate cuts. There now also appears to be a “Trump put” in the markets (meaning if it drops to a level the White House will step in to help). Movement on tariffs in the form of deals and changes could change market sentiment. Or over time the markets could just adapt to new policy. Moreover, the trends in Artificial Intelligence and new innovations can continue to drive growth.
We can continue to look for opportunities to rebalance, add to stocks at lower levels, and tax loss harvest. Consider Roth conversions at a now lower base which could result in lower taxes paid compared to the same account at the beginning of the year (then the bounce from a recovery would be tax free). Finally, as the market drops, future returns are expected to be higher.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Lincoln Investment. The material presented is provided for informational purposes only. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss. Diversification does not guarantee a profit or protect against a loss. None of the information in this document should be considered as tax advice. You should consult your tax professional for information concerning your individual situation.
https://www.retirement-professionals.com/bear2019
2Its debated whether the market predicts the recession or helps cause the recession with a negative wealth effect.
3https://www.nasdaq.com/market-activity/index/spx/historical