North River Wealth - 1Q 2025 Market Recap — North River Wealth Advisors

Summarized below is a recap of what happened in markets for the first quarter of 2025. Given significant market volatility and tariff news since the end of the quarter, we recently published a market update outlining our thoughts going forward. Please see our latest update here. We cannot stress enough to stay calm and not overreact during periods like the current market environment. After markets have fallen, there is often a temptation to sell to avoid additional losses. This almost always results in locking in losses and missing gains when the market recovers. Money invested in stocks should have a long-term investment horizon. If that money is needed in the short-term, it should not be in stocks. Short to medium-term income needs should be satisfied with cash and bond investments to allow ample time for stocks to recover. With a properly structured asset allocation, a falling market is stressful but should never result in forced selling when stocks are down.

Market Returns and the Power of Diversification

Concentrated US tech portfolios have been the darlings of the past few years, but that changed quickly in the first quarter of 2025 leading to a rough start for most US markets. Despite +20% gains for the S&P 500 over the last two calendar years, the first quarter of 2025 was plagued by tariffs, sticky inflation, and valuation concerns. The S&P 500 finished the quarter down 4.3% while US small-cap stocks represented by the Russell 2000 were down 9.5%. When you look further under the hood, most of the underperformance was driven by growth-oriented technology and consumer discretionary stocks. More value-oriented sectors like energy, health care and utilities, were in positive territory.

In a stark reversal from what we have experienced in recent years, international markets significantly outperformed US markets to start the year. The MSCI EAFE index, which includes stocks from developed countries in Europe and Asia, gained 6.9% on the quarter while emerging markets stocks climbed 2.9%.

Interest rates fell during the quarter (falling interest rates are good for bond returns), with the 10-year US Treasury bond yield moving from 4.58% to 4.25%. The overall US aggregate bond market finished the quarter up nearly 3%.

Source: BlackRock

Tariffs

First, what exactly are tariffs? Tariffs are taxes imposed on imported goods, making foreign products more expensive and, in some cases, making domestically produced alternatives more competitive.

When President Trump took office, he pledged to impose tariffs on key trading partners, including North American allies and China. These tariffs were implemented, leading to retaliatory tariffs from affected countries. Now, the prospect of additional tariffs looms.

The US’s largest import partners—Canada, Mexico, and China—supply essential goods such as machinery, electronics, and automobiles (according to the U.S. Census Bureau). Many of these tariffs were introduced to curb migration, combat illicit trade, and establish a fairer trade environment for the US. However, many economists argue that tariffs often backfire, driving up costs for American consumers and dampening economic growth.

While the administration has remained firm on its stance, we anticipate that ongoing negotiations with key trading partners may eventually lead to tariff reductions or even their removal over time.

What’s Next for The Fed?

The Fed was quiet during the first quarter of the year and kept short-term interest rates at the 4.25%-4.50% range at its March meeting. Ongoing political uncertainty (when is there ever certainty?), lower economic growth and stagflation concerns were mentioned during the Fed meeting. Stagflation is a period of slowing growth and rising inflation, something that is not a positive from a market perspective. What’s interesting about the stagflation fears is that 10-year US Treasury bond yields actually fell during the quarter, which would suggest that the market believes these fears are overblown. The Fed is trying to avoid a policy mistake of cutting rates too quickly, but it does seem inevitable that the next move will be a rate cut and not a rate hike and when there are rate cuts, it’s usually a positive for markets (lower bowering rates to help spur economic activity).

Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors. We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country. To learn more, contact us here.

This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.