Spring 2025 Newsletter: Thoughts on Tariffs and the Economy vs. the Stock Market

Welcome to the latest edition of our Swan Quarterly Newsletter. Each quarter, we're committed to bringing you timely topics of recent conversations we've been having with clients and actionable strategies to help you navigate the ever-changing financial landscape. In this edition, we're covering thoughts on tariffs and the economy versus the stock market. In addition, we're very excited to finally announce a new member of your financial team, Donny Stewart. As a Certified Financial Planner, Donny will add expertise and knowledge in a few different areas. More on Donny later.

Thoughts on Tariffs

When it comes to the stock market, some events are tactical and some are strategic. Tactical events, like a company's quarterly earnings report or a release of economic data, can be digested by the market quickly, often within seconds, and provide a clear if short-term picture. Strategic events, like a historical shift in trade policy, aren't digested that quickly, it could take weeks, months, quarters, or even years before their full effects show up in global markets.

Predicting the impact of a strategic event like tariffs is a fool's errand. It seems like everywhere you turn someone has an expert opinion on how the new trade policy will unfold. The reality is no one truly knows the long-term impact it will have.

Do tariffs cause inflation? They can raise prices on specific goods as companies pass costs onto consumers, but from an academic perspective tariffs raise prices once. Inflation is when prices keep rising. One is a price shock, the other is a failure of monetary policy. For context, the 2022 inflation rate hit 8%. What happened next? We experienced a temporary bear market, followed by a massive rebound in the following two years, with wages rising in that same period. We did this same song and dance with the China trade wars in 2018 to 2019, volatile times that ultimately passed.

Will tariffs increase federal revenue? They should, but the revenue is a drop in the bucket compared to our national debt.

The trade war has caused stocks to fall on a year-to-date basis. When the market is negative, it can be very tempting to do something, anything, to protect your investments. Watching dollars vanish from your investment account week after week is painful and frightening. However, we are not making any sudden, knee-jerk reactions to the ever-changing tariff news. Market downturns are part of the journey. Our investment philosophy remains disciplined while sticking to our process: each quarter we rebalance every portfolio to keep your investments aligned with your long-term strategy, and for clients with taxable accounts, we've been actively tax-loss harvesting, which can offset other gains and reduce annual taxable income. For folks with cash on the sidelines, it's been a great opportunity to buy stocks at a discount.

The moral of the story is that investing isn't just about numbers and stock prices, it's about staying resilient in a changing world. Bad investors sell in markets like this. Good investors get nervous but hold. Great investors are completely unfazed. The best investors get excited about potential opportunities. For our clients, staying sane when everyone is going insane is a superpower.

The Economy vs. the Stock Market

The stock market is not the economy, and the economy is not the stock market. While related, they're not the same thing, and understanding the difference can help investors stay grounded during volatile times. The economy reflects real production, employment, wages, consumer spending, and inflation, how people on Main Street are earning, spending, and living. The stock market is forward-looking, driven by investor sentiment, speculation, headlines, and forecasts. It can rise when the economy is struggling, and fall during times of strong growth.

At Swan, we love to use analogies. The relationship between the stock market and the economy is much like taking a new puppy for a walk. The owner holding the leash is the economy, sometimes walking faster, sometimes slower, but always staying on the sidewalk and leading toward the final destination. The stock market is the brand-new puppy, darting side to side, stopping to sniff something interesting, sometimes running ahead, sometimes pulling back. In the short term, it's genuinely hard to predict what the puppy will do next.

Looking back at the first quarter of 2025, the economic landscape presented a mix of optimism and, in our opinion, overdue uncertainty. Investors began the year hopeful due to significant AI investment and prospects for pro-growth policies like deregulation and tax cuts. As the quarter progressed, cracks appeared, leading to more uncertainty and cooling data. As of March 2025, U.S. annual inflation stood at 2.4%, down from 2.8% in February, reflecting easing price pressures notably in energy and transportation. The Federal Reserve paused rate cuts, holding the federal funds rate at 4.25% to 4.50%. The Fed's March projections lowered 2025 GDP growth to 1.7% (from 2.1%) and raised core PCE inflation to 2.8% (from 2.5%), expecting only two 25-basis-point cuts for the year. The unemployment rate held steady at 4.0% to 4.2%, with nonfarm payroll gains averaging around 145,000 monthly, though quit rates, real wages, and hours worked showed some signs of softening.

In our Winter Newsletter, we wrote about how diversification can often feel disappointing. Well in Q1, diversification prevailed. We entered the year with U.S. stocks among the most expensive ever from a fundamentals standpoint. The good news is we're finally seeing a reversion to the mean in other asset classes like international, fixed income, and commodities, which served as a ballast in portfolios year-to-date. A broad rally in previously-underperforming asset classes is a sign of healthy global markets.

2025 Q1 Update: An Action-Packed Quarter

Over the last three months, we experienced widespread volatility due to the emergence of a Chinese AI company that disrupted U.S. tech stocks, a new administration entering the White House, unprecedented cuts to government spending and payrolls, daily tariff updates and predictions, and economic data showing signs of cooling. There was a three-week span starting in mid-February when U.S. stock indices fell into a correction (a decline larger than -10%). Here's how the broader indices fared for the quarter: S&P 500 -4.3%, Dow Jones Industrial Average -0.9%, Nasdaq 100 -10.3%.

Meet Donny

We're excited to introduce Donny Stewart, a Certified Financial Planner who has joined the Swan Wealth team. Donny brings additional expertise in financial planning, and we'll share more about him in upcoming editions as clients have a chance to meet him.