Tariff Turbulence
Volatility returned to financial markets in dramatic fashion during the first quarter of 2025. The year started off strong, with global markets rallying throughout the month of January. Things took an abrupt turn in mid-February as investors wrestled with the uncertainty of tariff actions and their implications. US stocks, as measured by S&P500, ended the first quarter with a decline of -4.27%.
Investment diversification showed its worth during the last few months. While US stocks struggled, international stocks rallied, as seen in the EAFE index gaining +6.86% during the first quarter. Bonds and fixed income investments also fared well, with the Bloomberg Agg bond index returning +2.78%.
Most of the time, market volatility and declines are driven primarily by uncertainty. In this instance, the cause is well known and could change just as quickly based on geopolitical actions. The reason for the economic concern is that tariffs are essentially a tax on consumption. Like any tax, they decrease the amount of dollars available to households and businesses, which impacts consumer spending. Roughly 70% of US GDP is made up of consumer spending, so less dollars available to circulate can have a notable impact.
Similarly, businesses will typically increase costs, but often not enough to fully absorb the tariff expense, leading to both reduced profits (due to the higher costs that aren’t fully passed through), and reduced sales (due to fewer dollars being available from consumers).
The goals of driving increased domestic investment and production are admirable, but modifying global supply chains and manufacturing facilities that have been built up over multiple decades is not something that can happen quickly. In the meantime, the market will likely remain volatile until the trade war stabilizes, at which time investors and markets can more accurately adjust to the new reality.
That said, newly negotiated “deals” or tariff changes could send the market roaring back at any moment. Trying to accurately time exits and entries is nearly impossible. It’s for that reason that we favor a methodical approach that is consistent, repeatable, and has provided the best results historically. When markets are flying high, we capture growth by rebalancing and trimming areas with outsized gains – both to provide income (if needed), or to ensure risk levels stay in check. When markets decline, dollars can be shifted back in to take advantage of the low prices.
News Regarding Commonwealth
As you know, we’ve chosen to affiliate with Commonwealth Financial for more than a decade. They provide various “back office” services to independent firms like ours, including facilitating account custody/clearing arrangements. Yesterday it was announced that Commonwealth will be acquired by LPL Financial. At some point in mid-2026, it is expected that accounts will transition from our current custodian, NFS, to LPL’s custodial platform. This should be a seamless transition that requires no action from you, except for requiring new online account access log-in credentials.
Over the next year, we’ll be conducting substantial due diligence into LPL and their platform to ensure it will be a good fit for our firm and our clients. We’ll provide further updates as that process progresses.
As always, please let us know of any questions that arise.
The Pratt Wealth Management team
