Most fundamental economic change comes at a price, and unfolds over a period of time. That period of time tends to be years, not months or a week.

As we noted in our Insights published on March 16, “…there is method to the madness. Uncertainty is related to Chaos, and sometimes instigates. But in Chaos lie opportunities…

The one certainty about change is its impermanence.

What is not being talked about much in all the cacophony around tariffs, especially as a source of inflationary input, is the clear slackening in demand in some of the service areas that previously were so very strong: airlines and hotels. Prices for both have not only leveled off, but decreased over the last couple of weeks. The same is true for gasoline. There appears to be a normalizing adjustment taking place.

Stock prices in the United States have adjusted to more reasonable valuations. The U.S. Treasury yields from 2 years to 30 years look fairly normal to us for the first time since the Great Financial Crisis of 2008-2009:

Source: United States Treasury 4/10/2025

While we can certainly argue that the term premium for the 30-year vis-à-vis the 2-year is too small, the slope of the curve seems to us more in line with history, as are the absolute levels in contrast to Gross Domestic Product (“GDP”).

The volatility in the stock and bond markets since April 2 has been remarkable, but we have seen this before when a reversal (change) happens. At Advocacy Wealth, we believe that we have used the volatility to your advantage by rebalancing your holdings to our models, in which we have high conviction.

We’ve written in earlier Insights about the process of market normalization. Our comments above speak to just that point: valuations are becoming more reasonable across the major asset classes.

Over the days since early March, generally stocks have gone down in value while bonds and alternatives have gained or gone down much less in value. Since we still believe in the long-term return prospects in the models, we sold some of what has risen or held in value in order to add to what has declined. “Buy low; sell high” is what this discipline attempts to accomplish over time.

For those in models balanced between stocks and bonds, time is your friend. Panic is not your friend. Stick with the plan, and we believe strongly that the probable outcome will be favorable – over time.

Investors are coming to grips with the adverse consequences of rising tariffs along with the possibility of an interim peak in AI spending. The S&P 500 Index fell 4.3% during the first quarter. After two years of outsized gains relative to the rest of the market, the “Magnificent 7” (i.e., Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) were clear laggards this past quarter, declining 16% and ceding market leadership to energy (+9%) and health care (+6%). The S&P 500 Equal Weighted index fell just 1.1%, reflecting broader participation in the market this quarter. For the quarter, favorable stock selection, particularly within financials, along with an overweight position in healthcare stocks boosted the performance of your portfolio relative to the benchmark.

The reality that the Trump administration is intent on implementing higher tariffs on imported goods from most trading partners – both friends and foes alike – has weighed heavily upon investors. Tariffs are a tax ultimately borne by consumers that have the effect of raising prices and slowing growth. Even after Trump’s partial walk-back of his announced April 2nd tariffs, investors are still uncertain how much is negotiating tactic and how much is intended to produce permanent revenue for the government and incentivize a return of manufacturing to the U.S. Additionally, it has become clear that the “bad” medicine of tariffs, federal spending cuts, and tighter immigration controls must be absorbed before the “good” medicine of tax cuts and regulatory relief arrives. Sequencing matters in terms of the impact on the economy.

Uncertainty surrounding tariffs has been reflected in surveys of consumers and business leaders over the past couple of months, resulting in falling confidence that poses a threat to spending and hiring. This is a sharp reversal from the “animal spirits” that were unleashed immediately following the November election. Investors are now on high alert awaiting evidence that this “soft” survey data is flowing thru to more tangible (“hard”) measures of economic activity. Thus far, at least, the evidence has been scant. However, risk for the economy is now more elevated, even at tariff levels that are less than the worst case scenarios raised by the initial April 2nd announcement.

Due to the on-again, off-again nature of tariff announcements, economists and strategists have been forced to move their recession probabilities around in response. Fortunately, Trump appears to have pulled us back from the brink of near-certain recession based on his initial reciprocal tariffs, but for now we believe it is only a temporary reprieve and thus remains a fluid situation. In any case, outlooks have been tempered due to the threat of a trade war. The consensus economic growth forecast for the year has come down by at least 1% since the start of the year. We have lowered our full-year 2025 GDP growth forecast from 2-2.5% to 1-1.5%.

The Atlanta Fed’s widely followed GDPNow real-time economic model currently projects first-quarter real GDP to decline 0.3% q/q annualized, after adjusting for an anomalous spike in non-monetary gold imports during the quarter to better align with the methodology used by the Bureau of Economic Analysis. This represents a sharp slowdown from the 2.5-3.0% growth registered for the prior three quarters. And this is before the real brunt of the recently announced tariffs has been felt.

The Federal Reserve’s Open Market Committee (“FOMC”) likewise adjusted its forecasts at its March meeting to reflect slower growth and higher inflation due to tariffs. Core inflation (both CPI and PCE) continues to stubbornly hover around 3%, above the Fed’s 2% target. With higher-than-expected inflation along with the prospect that tariffs may push price levels even higher, the Fed was forced to postpone further rate cuts for the time being.

Meanwhile, investor concerns about the possibility of a near-term peak in AI-related spending has weighed on the “Mag 7”. Fears were initially sparked in January by revelations about significant cost and efficiency gains reported by DeepSeek, the Chinese developer of a large language model to compete with OpenAI’s GPT-4, Google’s Gemini, Meta’s Llama 3, and Anthropic’s Claude 3.5, among others. The impressive performance of the DeepSeek model at a fraction of the run-rate costs of the others raised doubts about the level of investment needed to support AI applications and use cases. It also raised the stakes for developers of AI-related applications and services to begin demonstrating more tangible returns on the massive AI spending that is currently taking place. All this is important considering the still outsized influence that the “Mag 7” has on the market-capitalization weighted S&P 500 index, which still sits at about 30%. Further declines by the “Mag 7” could continue to weigh on the overall index.

We have reduced our estimate for corporate profits this year to reflect our slower economic growth outlook. Our estimate for S&P 500 EPS has been cut from $270 to $255, an increase of just +5% year-over-year, down from +10-12% previously. The bottom-up consensus still sits close to $270, which suggests the gap between the two estimates will need to close. We expect that to happen over the coming weeks as we progress through first quarter earnings season and corporate executives revise their profit forecasts lower due to tariffs.

We continue to believe expansionary tax cuts and regulatory relief are on the way, but as of now that still seems like a late-2025 or early-2026 story. In the meantime, the economy is facing some definite headwinds, including two major supply shocks (labor and imported goods), fiscal austerity resulting from DOGE federal spending cuts, a Federal Reserve that is sidelined for the time being, and a potential reverse “wealth effect” due to falling stock prices. As such, we believe it remains prudent to maintain somewhat higher than normal cash reserves in our clients’ accounts until we gain greater visibility that some or all of these headwinds are starting to lift.

Despite the aforementioned stubborn inflation reports, investors moved away from risk assets during the first quarter and bought US Treasuries. The yield on the benchmark 10-year Treasury note peaked in mid-January at the 4.80% level and then moved lower, reaching 4.20% in early March. The rest of the month saw a trading range of between 4.20% and 4.35%, and the 10-year Treasury ended March at a yield of 4.21%, 36 basis points (0.36%) below the December 31st level.

The yield curve, as measured from the 2-year to the 10-year Treasury yields, ended the quarter exactly where it began, at 33 basis points (0.33%). Yield spreads on corporate bonds began to widen a bit towards the end of the quarter as investors began to factor in the possibility of tariff-related economic weakness. Investment grade corporate credit spreads widened 14 basis points (0.14%) to 0.94% and high yield credit spreads widened 60 basis points (0.60%), breaking back above the 3.0% level to end the quarter at 3.47%. The ICE BofA 20+ year Treasury Index gained 4.76% during the quarter, the ICE BofA US Corporate/Government Index gained 2.76%, and the intermediate ICE BofA 1-10 Year Corporate/Government Index gained 2.41%.

Subsequent to quarter-end and following President Trump’s tariff announcements on April 2nd, bond market volatility increased. This pressure continued to intensify and reached dangerous levels the evening before the Administration’s ninety-day pause on April 9th to negotiate tariffs with most US trading partners.

Risk control remains a key part of our ability to deliver less adverse outcomes during this period of increased policy volatility which is the root cause of the current market price volatility. But as pointed out, we will continue to invest for you within our discipline and as opportunity from volatility presents itself to advantage you over the longer term

The model portfolio performance returns shown are hypothetical, for illustration only, and do not represent the performance of a specific actual client account. Performance does not reflect actual trading, nor does it include variable transaction expenses which would further reduce returns. Each AWM model series portfolio invests in securities which have weighted allocations that drive the performance results. The underlying constituent performance results reflect actual historical performance. Returns on the investment in the model portfolio assumes reinvestment of dividends and capital gains. The models performance reflects rebalance those allocations in response to market conditions, as well as at the initial point in time a change was made to an individual allocation within the model.

The S&P 500 Index, and sub-indices reflective of the S&P 500’s various sector components, are unmanaged indices commonly used as benchmarks to measure broad U.S. stock market performance and characteristics and sector-specific performance and characteristics respectively. The Magnificent 7 is an unmanaged sub-set of stocks in the S&P 500 Index used to illustrate the impact of certain sector and stock constituencies on the S&P 500 Index as a whole. The reinvestment of dividends, interest, and other distributions is assumed. These are free-float weighted/capitalization-weighted indices. An additional reference is made to the S&P 500 Equal Weight Index (EWI) which is the equal-weight version of the widely used S&P 500. The equal-weight index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The MSCI ACWI Index is an indicator of global markets, capturing approximately 85% of the global investable equity opportunity set, including stocks predominantly across the large and mid market cap spectrum and across a number of countries, both developed and emerging. Bond data provided by ICE BofA sourced from an independent provider of corporate bond indices. Indexes used as benchmarks cannot be directly invested in by you. Index performance is also for illustration only, to provide a relative comparison for the model portfolio. Index performance does not reflect any management fees, transaction costs or expenses.

The views expressed represent our assessment of our strategies and the market environment as of the dates represented in the publication and should not be considered investment advice or a recommendation to purchase or sell any specific security or invest in a specific strategy nor used as the sole basis for an investment decision. Views and holdings are subject to change.

There are no guarantees that a strategy will achieve its investment objective. All investments involve risks that you will lose value including the amount of your initial investment. Investments that offer the potential for higher rates of return generally involve greater risk of loss. Clients should review carefully reports or statements produced by us, such as for performance and cash flows, and compare the official custodial records to any such that we provide. Information we provide could vary from custodial statements based on accounting procedures, reporting dates, or valuation methodologies of certain securities.

References to specific securities/ETFs are not intended as recommendations of said securities and carry no implications about past or future performance. Holdings and weights are subject to change. Information about all recommendations made within the past year is available upon request.

Reinvestment transactions that involve selling existing investments may involve transaction and taxation costs associated with the sale of those assets as well as transaction costs associated with the purchase of new investments.

International investing: There are special risks associated with international investing, such as political changes and currency fluctuations. These risks are heightened in emerging markets.

Small/Mid-Capitalization investing: Investments in companies with small or mid-market capitalization ("small/mid-caps") may be subject to special risks given their characteristic narrow markets, limited financial resources, and less liquid stocks, all of which may cause price volatility.

Growth Stock Risk: Growth stock investments, whether directly or through ETFs and mutual funds, may be more sensitive to market movements because their prices tend to reflect investors’ future expectations for earnings growth rather than just current profits.

Sector Risk: To the extent a strategy series has substantial holdings within a particular sector, the risks associated with that sector increase.

Liquidity / Market Risk: The strategy series may not be able to purchase or dispose of investments at favorable times or prices or may have to sell investments at a loss. Additionally, market prices of investments held by strategy series may fall rapidly or unpredictably due to a variety of factors, including changing economic, political, or market conditions, or other factors including war, natural disasters, or public health issues, or in response to events that affect particular industries or companies.

High-Yield investing: Investments in high yielding debt securities are generally subject to greater market fluctuations and risk of loss of income and principal, than are investments in lower yielding debt securities.

Inflation Protected Bond investing: Interest rate increases can cause the price of a debt security to decrease. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

Interest Rate Risk: This risk refers to the risk that bond prices decline as interest rates rise. Interest rates and bond prices tend to move in opposite directions. Long-term bonds tend to be more sensitive to interest rate changes and therefore may be more volatile.