After six consecutive quarterly gains, the S&P 500 index declined 4.3% and the NASDAQ index dropped 10.3% in this year’s first quarter. The year started with gains in January and February, navigating a rotation out of the Tech sector and into lagging sectors, most notably consumer staples, healthcare and energy. March saw a broad sell-off as the S&P 500 index declined 5.6%, including an 8.5% drop from the mid-February market peak. April thus far has seen further selling amidst increasing levels of volatility.
Far more damaging to equity markets than the tech rotation and downdraft has been the new administration’s aggressive and unpredictable tariff policies. We expect higher tariffs will create inflationary and economic headwinds. The uncertainty and ever-changing headlines impair economic activity, spending decisions and erode consumer confidence and sentiment.
Although the economy has been resilient and growing, recent macro-economic data points demonstrate increased concerns. Sentiment indexes have fallen sharply, with consumer confidence hitting a 12-year low in the quarter. The Fed’s projection of 2025 gross domestic product (GDP) growth declined from 2.1% at the beginning of the year to 1.7% last month.
The probability of stagflation (a recession combined with inflation, last seen in the decade of the 1970s) will increase with the implementation of tariffs. A global trade war would further impede the Fed’s best efforts to engineer a soft landing (moderating GDP growth and low inflation) that seemed possible at the start of the new administration.
With the government debt now at $36 trillion and growing, the current administration is focusing on reducing interest rates. A tariff induced recession might succeed in achieving further rate declines and stability but if high inflation accompanies the recession, a continued downtrend and the malaise of a bear market could be in store.
Fairview’s investment strategy is to position for multiple scenarios by holding best-in-class stocks at reasonable valuations across the sector spectrum. We are invested in several companies addressing market niches that are less exposed to the broader economic cycle. In these dynamic and challenging times, we are monitoring developments closely.
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