Liberation Day Q1 Market Update

Market Environment Indicator (MEI)
MEI readings declined from last week, but the indicator remains Positive after improving from Neutral last week. The weight of the evidence suggests that the current decline is not expected to extend into a significant downtrend. If the MEI reverses to Negative, it would be a signal of more substantial problems ahead.

Liberation Day
The S&P 500 and Nasdaq have recently had some of their worst days since 2022. If you’re following the news headlines, you have likely seen that the explanation for recent market volatility and losses is due to the anticipation of President Trump’s “Liberation Day” tariffs announcement. By the time you read this, the tariffs will have been announced, and the U.S. market reaction will be seen in tomorrow’s (4/3) trading. Times like these can feel uneasy, so I wanted to write a brief note to share my perspective. I hope you find this helpful, but please always feel free to reach out with any questions.

Understanding Market Concerns
While tariffs have been front and center amid recent market volatility, other economic data is adding to market concerns. It’s important to note that slow growth is part of the business cycle and doesn’t necessarily mean the cycle is ending.

Here are some important perspectives:

• Recession Forecasts: In recent interviews, President Trump did not rule out the possibility of a recession. Some investors and economists have been worried about a recession for the past three years. Just a year ago, many believed an economic downturn would be imminent due to inflation. Despite these fears, the stock market has performed well over this period with the S&P 500 still up nearly 60% since the bottom in 2022, and 10% over the past year. It’s important to take these forecasts with a grain of salt.
• Economic Policy Changes: New tariff policies have created market turbulence, although historical evidence suggests their long-term economic impact may be less severe than initial market reactions indicate. For example, in 2018 the market fell as tariffs were implemented, but earnings growth was still strong, and GDP was almost 3% that year. Eventually, new trade deals were reached.
• Inflation Concerns: The Consumer Price Index rose above 3.0% for the first time since last summer but has fallen slightly since then. This affects both consumer sentiment and spending patterns. Inflation has been closely watched for several years as it is a key consideration for how the Federal Reserve directs interest rates. Elevated inflation will make it difficult for the central bank to cut interest rates if the economy begins to slow.
• Employment Changes: Recent federal government layoffs have caused some concern, with the latest employment data showing a decrease of 10,000 federal jobs, though this number is likely to rise in future reports. While federal workers account for less than 2% of the workforce, there is concern of ripple effects on the private sector and job growth overall. Overall job growth remains positive, with unemployment still near historic lows.
• Consumer Sentiment: Survey data shows increased pessimism about future financial conditions, with inflation expectations reaching levels not seen since 1995. While this could impact future spending, how consumers feel can change quickly as well.

Maintaining Perspective
The potential for some period of turbulence as trade policy takes shape can be challenging. However, the pro-growth policies that had excited markets last year are still on the table. For example, an extension of the Tax Cuts and Jobs Act (TCJA) is currently being considered by Congress and significant pro-growth regulatory changes are in progress.

Market declines are never pleasant, but they are a normal part of investing. History shows that staying invested through challenging periods has typically rewarded patient investors.

Looking Forward
While tariff and recession concerns have increased, it's crucial to remember that economic forecasts are often unreliable timing indicators for investment decisions. What’s more important is holding a flexible, well-constructed portfolio that can withstand all parts of the market cycle. Please be on the lookout for additional communications in the weeks ahead, including my next letter which will explain how our investment philosophy and strategy are specifically designed, and particularly well-suited, for uncertain market environments.

Ultimately, current market conditions may feel uncomfortable, however maintaining a long-term investment perspective is still the best approach to achieving your financial goals.

Gratefully,

Sean Gross, CFP®, AIF®
Co-Founder & CEO