Stembrook Market Review - First Quarter 2025

After a relatively quiet start to the year, equity markets reacted with an abrupt selloff after President Trump's April 2^nd announcement of severe tariffs that would be levied upon the majority of the United States' trading partners. Equity markets continued to fall in the days that followed. Shares of import reliant, technology firms fell sharply after the tariff announcement. Since the beginning of April, the Nasdaq has fallen by -5.3%¹ but has since moderated after the initial selloff. Small cap stocks in the U.S. were also heavily impacted, falling by -8.9%.² Non-U.S. stocks were less impacted by the announcement. Developed non-U.S. stocks fell by only -0.4%³ and Emerging Markets equities fell by -3.7%⁴ when this review was published.  The U.S. investment grade bond market was not completely unscathed as yields rose and the price of bonds fell by -0.6%.⁵ As stocks continue to waiver, it is import to realize that this dispersion in returns emphasizes the benefit of a diversified approach. 

During times of market turbulence, the importance of understanding your investment time frame and having a diversified portfolio should be clearly in focus. Typically, during periods of volatility, bond and stock prices move in opposite directions, tempering downward moves. This is especially important in the short term, as can be seen in the first column of the chart below. The range of returns is considerably more narrow for a 60/40 portfolio (gray) versus the all stock portfolio (green). Over a longer-period of time (to the right on the chart), returns tend to narrow into tighter bands with very few instances of negative returns even in stocks over a 10-year period. This highlights the fact that it is important to consider your time frame and liquidity needs when investing. Long-term investors can afford to take more risk, whereas volatility can potentially disrupt the outcome for an investor with a short time horizon. In general, short-term liabilities or cash flow needs should be matched with cash or short duration bonds and not stocks.

Diversification and Volatility Over Time

Over time ranges of return narrow, but in the short-term diversification is the best way to narrow dispersion of returns.

 

Our proprietary models forecast long-term, pre-tax returns ranging from 3% to 5% for fixed income-like asset classes and 9% to 10% for equity-like asset classes (see Expected Market Returns and Risks table). Our more detailed observations and current portfolio positioning are outlined in the following comments. 

Expected Market Returns and Risks 7-10 Year Horizon

A sampling of return expectations produced by our models. Expected returns are projections and are not guaranteed.

Historical Market Returns

Historical market returns as of March 31st 2025. Note that looking backwards at recent returns is not a reliable method of predicting future returns. 

Yields Across Asset Classes

Yields are an indicator of future returns. Orange dots show current yields, blue bars show historical ranges.

• Citing tariffs and trade disruption, the IMF downgraded global growth forecasts for the coming years. In their April 2025 update, the IMF forecasted that world economic output would slow to a 2.8% annualized pace this year, adjusted for inflation. Economists expect growth to tick up slightly to 3.0% in 2026.⁶
• Economists expect weaker growth in the United States, with annualized real GDP growth dropping by 1% to 1.8% this year and 1.7% in 2026. Similar levels of growth are expected in other advanced economies.⁶
• Emerging economies are expected to have slower growth in the coming years as well, with GDP falling to 3.7% this year, followed by a slight uptick to 3.9% next year.⁶
• While still elevated, global inflation is expected to continue moderating in 2025 to 4.3% and 3.6% in 2026.⁶
• U.S. inflation continues to show signs of potentially resurfacing. CPI was up 1.3% in the first quarter, but remains at a below-average level of 2.4% over the trailing 12 months.⁷  Tariffs are inherently inflationary, so we will be watching to see if a multi-year reduction in inflation shows signs of reversing as the trade situation evolves.
  

• After a strong year in 2024, the U.S. Dollar fell by -8.4% through April 16^th, driven by a decline in demand as non-U.S. investors fled dollar-denominated assets. This decline in the currency helped bolster returns in Non-U.S. equities.⁸ 

• After a very strong year in 2024, large cap stocks in the U.S. started the year strong, but ended the first quarter down by -4.3%.⁹
• As mentioned earlier, non-U.S. stocks had strong returns, up 5.2% in the first quarter.¹⁰
• As geopolitical tensions continued to rise, global aerospace and defense stocks had a very strong start to the year, up over 15.3% in the quarter.¹¹
• Concerns over tariffs and trade disruption weighed heavily on the auto industry, as these stocks were down nearly -22%. Semiconductors also felt the brunt of trade disruption down -13.6%.¹²

• Concerns of resurfacing inflation helped push treasury inflation protected securities (TIPS) higher, up 4.3% in the quarter.¹³
• Municipal bonds were down slightly in the quarter by -0.6%.¹⁴
• Volatility concerns hit high yield bond returns, especially toward the end of the quarter, but high yield still finished the quarter up 1%.¹⁵

^{Global Asset Class Returns}

Returns are arranged in columns, by year. Each color represents a different asset class. Each year, the leaders and laggards tend to shift. Diversification across a range of asset classes can smooth returns and enhance growth.

• We maintain our neutral duration position in fixed income portfolios as interest rates have risen to levels that are closer to historical averages.
• We maintain our neutral allocation to emerging market equities.
• We maintain a neutral exposure in large-cap U.S. equities.
• We favor lower priced, value-oriented equities, both in the U.S. and abroad, which tend to outperform the broad market over time, with less volatility. While these stocks did not keep pace with some of the tech-oriented growth names in 2024, they have been providing downside protection in the first part of 2025. We are optimistic about their return potential going forward. 

We continue to focus our efforts on helping you meet your financial objectives by following our disciplined investment approach. Our approach uses return and risk models, incorporating fundamental valuations and tax-efficient strategies. This investment discipline is tailored to your individual situation in our continuing effort to craft and implement your customized investment solution. 

As always, we thank you for placing your trust in our investment management and advice and welcome your questions and comments at any time.

Peter & Tom

Endnotes and Sources:

Text: 

1. Morningstar: NASDAQ 100 TR. 12/31/2024 - 4/16/2025.
2. Morningstar: S&P SmallCap 600 TR. 12/31/2024 - 4/16/2025.
3. Morningstar: MSCI EAFE NR USD. 12/31/2024 - 4/16/2025.
4. Morningstar: MSCI EM NR USD. 12/31/2024 - 4/16/2025.
5. Morningstar: Bloomberg US Aggregate Bond Total Return. 12/31/2024 - 4/16/2025.
6. IMF World Economic Outlook Update: April 2025.
7. Bureau of Labor Statistics: CPI For All Urban Consumers 3/31/2025.
8. Barchart: $DXY—U.S. Dollar Index. 12/31/2024 - 4/16/2025.
9. Morningstar: S&P 500 TR. 12/31/2024 - 3/31/2025.
10. Morningstar: MSCI ACWI Ex USA NR USD. 12/31/2024 - 3/31/2025.
11. Morningstar: MSCI ACWI Aerospace and Defense NR USD. 12/31/2024 - 3/31/2025.
12. Morningstar: MSCI ACWI Automobiles NR USD, MSCI ACWI Semiconductors & Semiconductor Equipment NR USD. 12/31/2024 - 3/31/2025.
13. Morningstar. Morningstar US TIPS Bond TR. 12/31/2024 - 3/31/2025.
14. Morningstar: S&P National AMT Free Muni TR USD. 12/31/2024 - 3/31/2025.
15. Morningstar: Bloomberg US Corporate High Yield TR USD. 12/31/2024 - 3/31/2025.

Charts: 

Diversification and Volatility Over time

Source:J.P. Morgan Guide to Markets as of March 31st, 2025. Bloomberg, Factset.Federal Reserve, Standard & Poor's, Strategas/Ibbotson, J.P. Morgan Asset Management.

Returns shown are based on calendar year returns from 1950 to 2024. Bonds represent Strateges/Ibbotson for periods prior to 1976 and rgw Bloomberg Aggregate thereafter. Growth of $100,000 is based on annual average returns from 1950 to 2024. 

Expected Market Returns and Risks, 7-10 Year Horizon: As of 3/31/2025.

Source: Stembrook Research.

(1) Volatility is measured in terms of Standard Deviation. Standard deviation is the statistical measurement of dispersion about an average, which depicts how widely a stock or portfolio’s returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that is most likely for a given investment. When an investment has a high standard deviation, the predicted range of performance is wide, implying greater volatility. If an investment’s returns follow a normal distribution, then approximately 68 percent of the time they will fall within one standard deviation of the mean return of the investment, and 95 percent of the time within two standard deviations. For example, for a portfolio with a mean annual return of 10 percent and a standard deviation of two percent, you would expect the return to be between 8 and 12 percent about 68 percent of the time, and between 6 and 14 percent about 95 percent of the time. Source: Morningstar.

Historical Market Returns: As of 3/31/2025.

Source: Morningstar, Stembrook Research.

Indices: Bloomberg Barclays U.S Treasury Bills 1-3 Month Total Return, Bloomberg Barclays Municipal Bond 5 Year (4-6) Total Return, Bloomberg Barclays U.S. Aggregate Bond Total Return, Bloomberg Barclays U.S. Corporate High Yield Total Return, FTSE All Equity REIT Total Return, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Total Return, MSCI EM (Emerging Markets) Total Return, Consumer Price Index – U.S., S&P 10 Year U.S. TIPS Total Return, Bloomberg Commodity (Total Return) Index.

Yields Across Asset Classes: As of 3/31/2025.

Sources: Cash Equivalents Yields since March 1976. Ibbotson, Federal Reserve Bank, Thomson Reuters, Municipal Bond Yields since March 1988. Barclays Capital, Charles Schwab, BofA Merrill Lynch, Standard & Poor's/Investortools Municipal Bond Indices, Investment Grade Bond Yields since March 1976. Barclays Capital, High Yield since December 1984. BofA Merrill Lynch, Barclays Capital, Real Estate (Public) Earnings Yield since March 1976. NAREIT all Equity, Large Cap U.S. Equity Earnings Yield since March 1976. Standard & Poor's, BARRA, Mid Cap U.S. Equity Earnings Yield since June 1991. Standard & Poor's, BARRA, Small Cap U.S. Equity Earnings Yield since December 1993. Standard & Poor’s, BARRA, Developed Europe Equity Earnings Yield since March 1976. MSCI Europe, Standard & Poor's Europe 350, Developed Pacific Equity Earnings Yield since March 1976. MSCI Pacific, S&P/Citi PMI Asia Pacific, S&P Asia 50, Emerging Market Equity Earnings Yield since December 1998, Inflation-Linked Bond Real Yield to Maturity since March 1997. Citi Yield Book, Federal Reserve Bank. Note: Yields are not perfect predictors of future returns and should not be used in isolation.

Global Asset Class Returns: As of 12/31/2024.

Source: Thomson Reuters, Bloomberg, Morningstar, Stembrook Research.

Indices: Consumer Price Index – US, U.S. 30-Day Treasury Bills, Bloomberg Barclays U.S. Treasury Bills: 1-3 Month Index, Citigroup Inflation-Linked Index, S&P 10 Year US TIPS Index, Bloomberg Barclays U.S. Aggregate Bond Index, BofA Merrill Lynch U.S. High Yield Cash Pay, Bloomberg Barclays U.S. Corporate High Yield Index, Dow Jones Wilshire REIT Index, FTSE All Equity REIT Index, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Index, MSCI EM (Emerging Markets) Index, Dow Jones AIG Commodity (Totl Ret) Index, Bloomberg Commodity Index.

Disclosures

This material is intended to inform you of products and services offered by Stembrook Asset Management, LLC (“Stembrook”). Stembrook is a U.S. Securities and Exchange Commission Registered Investment Advisor.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. The opinions, estimates, and investment strategies and views expressed in this document constitute the judgment of Stembrook, based on current market conditions and are subject to change without notice. The investment strategies stated here may differ from those expressed for other purposes or in other context.

 Past performance is not indicative of future results.

The obligations and securities sold, offered, or recommended are not deposits and are not insured by the FDIC, the Federal Reserve Bank, or any governmental agency.

The views and strategies described herein may not be suitable for all investors. This material is presented with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax adviser concerning such matters. 

Important note regarding Stembrook’s capital market expectations.

The capital market expectations developed by Stembrook Asset Management are estimates of both a central tendency of asset class behavior and a probable range of asset class behavior over a long-term horizon. These estimates are one of many inputs used in the portfolio construction process, and should not be used independently. These expectations should not be construed as the returns that will be achieved, but merely those that may be achieved if certain assumptions hold true. Also note that each client's portfolio may differ given specific goals and constraints applied to the portfolio construction process. 

Additional information is available upon request.