2025 Q1 Update

By Jason@vigilarewealth.com on April 11, 2025 in Investor Lounge

The first quarter of 2025 brought about some of the highest volatility observed in the markets since the Pandemic and the Global Financial Crisis. Markets hate uncertainty because it makes it difficult (or impossible) to make projections about the future and therefore assign an appropriate value to assets. The range of outcomes going into 2025 is as wide as we can remember. Because of this volatile environment, whipsaw volatility will be extremely challenging. Just a few days ago Goldman Sachs put out a research note saying the U.S. would be in recession this year, only to retract an hour later.

Please refer to our prior commentary which highlights our strategy for the year and the possible evolving scenarios. In that commentary we highlighted three potential markets environments: a 50s style roller-coaster whipsaw, a 1930s style recession (not depression), and a roaring 90s bull. After the first quarter we can almost rule out the roaring 90s bull. Our baseline scenario is still the 50s style whipsaw year, which includes a significant amount of volatility, but ultimately a market that is not that far up or down from where is started the year.

However, the recession scenario odds have risen from the start of the year. The stock market is NOT yet pricing a recession, and we are still within the range of this episode being a nasty correction. The odds of recession happening are not trivial. At the time of this writing the betting markets have recession odds at around 50%. We think this is a little too high, but regardless, we believe the odds have increased since the beginning of the year.

The root of the uncertainty and economic stresses today come from the violent push and pull between globalization and de-globalization forces. This has been a slow-burn thesis for years (decades), but the pandemic along with the recent push towards higher tariffs has accelerated this shift and has put this post WWII globalization paradigm into question. Nations cannot ignore this and will have to incorporate this potential shift into their strategy and long-term planning and make policy decisions accordingly. This also includes the global investment community having to decide where to invest.

In our view, the U.S. Bond markets, and U.S. dollar stability will lead to early clues to how well the U.S. is navigating. Foreign investors own $8.5 trillion or about 30% of marketable U.S. treasury debt. This along with the massive U.S. deficit (both fiscal and current account) and the ability for U.S. to orderly refinance will require the willingness of foreign investment to continue this trajectory. Also, net international investment has doubled in the last five years. Will this continue or will there be capital flight out of the U.S. and the dollar? This does make the U.S. vulnerable should there be a pendulum shift away from the U.S. The U.S. does benefit from having the global reserve currency status, but recent weeks demonstrate the fragile nature of this world order. Hence, why the administration announced an abrupt 90-day delay on reciprocal tariffs, only after the U.S. bond markets started showing signs of severe stress.

As we navigate through the next few quarters, we need to assess the implications that post-negotiation tariff policy has on consumer confidence, inflation expectations, earnings, Fed policy, country responses, etc. Also, weighing this against potential market friendly forces including tax cuts and deregulation. Because of so much uncertainty this is an impossible environment to make a confident forecast or prediction. As we have said in our prior commentary, our strategy and focus here and today is not to predict, but to respond and react to evolving data and developments and to try to latch onto the prevailing trends. We would not be surprised if the markets go on to make new highs, or conversely new lows. We have to be prepared and nimble for all outcomes. Against the backdrop of this economic uncertainty and still above average equity valuations, our focus will always be risk management first even if it means “missing out” over short term periods.

Thank you for your trust and confidence, especially in these uncertain times.

The Vigilare Wealth Management Team

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