Quarterly Review & Market Outlook – 1st Quarter 2025

You’ve got to know when to hold ‘em, know when to fold ‘em

Know when to walk away, know when to run

– Kenny Rogers, “The Gambler”

We entered the year more cautious than the last two. The economy was healthy and reasonably well-balanced, but monetary policy was tight. The post-election rally appeared to be overdone, especially for large technology companies where investors were paying a premium for the asymmetrical payoff from artificial intelligence (AI). By the end of March, though, this election bump was mostly unwound. The long overdue catalyst occurred in January, when the Chinese company DeepSeek released its R1 reasoning model that called into question ultimate payoff from the AI capex investment wave.

Diversification has worked to our advantage. During the quarter, most sectors outside of technology were positive. Our portfolios lean toward quality, value, and dividends, which provided ballast against the volatility of the tech-heavy S&P 500 Index. Positive developments in Europe created a glimmer of hope for renewed economic dynamism. Fixed Income has been an important bedrock, earning a solid yield and protecting capital during down markets.

The market selloff following President Trump’s April 2 tariff announcement was indiscriminate. This may seem confusing since the event itself was not a surprise. Trump was hyping his new global tariff regime on the campaign trail and clearly planned to follow through. Goldman Sachs expected an average tariff rate of 15% versus the 18% announced, not far off. Investors have also seen this film before and have confidence that the impact of tariffs can be buffered by the Federal Reserve.

In fact, markets initially rallied during the speech. Trump promoted a free trade agenda, demanding foreign countries “terminate your own tariffs, drop your barriers.” The selloff only started when he showed the actual tariff rates. Contrary to prior messaging, the new rates were not based on actual trade barriers, but simply on the dollar value of a country’s goods trade imbalance with the US divided by how much it exports to the US. This arbitrary definition undermined his earlier justification. It also implied there is no obvious path countries can take to remove the tariffs even if they wanted to.

What’s more, even if a country did somehow shrink their imbalance with the US, they still may not find reprieve. Trump imposed 10% tariffs on countries, like Brazil, that import more from America than they export to it. He applied a 32% tariff on Switzerland, which has an open trade policy and recently abolished all industrial tariffs, including on goods from the US. He included Israel just one day after it scrapped all tariffs on US imports. The market saw the impossible choices Trump imposed on other countries and decided the risk of escalation was higher than previously anticipated.

There is a game theory argument that says Trump is going all-in with pocket aces (the almighty US consumer) and countries will fold or risk losing everything. So far, countries that folded still lost. A more objective reading is that Trump and his team have strong ideological convictions on trade and threw down the gauntlet in a game with no clear rules or known endpoint.

All told, we like our diversified stance and prefer to remain cautious. If allowed to persist, these tariffs, plus any follow-on and retaliatory actions, could spark a wave of stagflation—slow growth with higher inflation. The S&P 500 is down 16% from the peak, but still up more than 2x over the last five years and closer to fair value than outright cheap. A more persistent stagflation does not currently appear priced into the market.

Our team is busy reviewing opportunities and looking to take advantage of the indiscriminate nature of the selloff. We like strong, durable cash flows. Areas in technology are trading at more attractive valuations and not directly exposed to AI capex or tariffs. Last year, we reduced our weighting to riskier credit. We are adding to short duration asset-based lending, which we believe is resilient to slowing growth and higher inflation. For investors in the highest tax bracket, municipal bonds offer attractive relative value, though we note the possibility that tax exempt income benefits could be capped in the tax bill moving through Congress.

We have a deep, experienced team that has managed through decades of market ups and downs. We build safety and resilience into our portfolios from the start because the future is unknowable. We are in constant discussion and debate about how to react appropriately in the face of uncertainty. We also acknowledge that much of this letter may become obsolete by the time it reaches your inbox, so please reach out with any questions or comments that come to mind.