AAF Wealth Management Q1 2025 Market Insights
In an ongoing commitment to keep you abreast on a range of issues that might affect your business and/or personal financial plans, AAFCPAs is pleased to share Q1 2025 Market Insights published by AAF Wealth Management, a wholly owned subsidiary of AAFCPAs. This provides investors with an understanding of what’s driven performance of late.
The first quarter of 2025 offered a mixed economic picture. Strong 2024 earnings provided early momentum, while varied readings on inflation, employment, and trade policy signal areas to watch in the months ahead. While these developments have given investors much to consider, the second quarter and remainder of the year are expected to bring continued shifts in trade policy—trends that merit close attention as the landscape continues to take shape.
In recognition of the rapid pace of change, our focus in this letter is on broader considerations that are developing rather than on specific tariff levels, market performance, or daily actions of countries. With so much in flux day to day, we encourage clients to think in broader terms when dissecting where the markets and global economy are heading.
In this letter:
The Trade War
On Wednesday, April 2, 2025, the White House unveiled sweeping tariffs including a 10 percent minimum tariff on all imports to the U.S., affecting nearly every country. In many cases, far higher levels were imposed on our trading partners, forcing U.S. consumers and foreign exporters to pay significantly higher costs with the intent of driving revenue into what Trump has described as an external revenue service. This aims to coerce businesses to establish manufacturing bases in the U.S.
The automobile industry was a key focus, with 25 percent tariffs directed at countries with competitors in the industry including Canada, Mexico, and Germany. These tariffs significantly increase the cost of automobiles, steel, aluminum, and car parts imported into the U.S., with President Trump hoping to force auto companies into building production facilities in the U.S. In total, nearly 70 percent of the European Union’s exports fall into these categories. In response, the EU announced its intent to impose $28B in retaliatory tariffs on U.S. goods covering a wide swath of products ranging from bourbon to pharmaceuticals and Harley Davidson motorcycles to Levi’s jeans.
Meanwhile, Asian countries have been set to bear a large brunt, facing tariffs that, in some cases, exceed 100 percent on imported goods. Because U.S. companies increasingly moved manufacturing bases from China to Vietnam after the COVID-19 slowdown, Vietnam has found itself with a tariff level at 90 percent. By contrast, China, our third largest trade partner by total dollars, faced tariffs exceeding 100 percent on many consumer goods imported into the U.S.
As of April 9, 2025, President Trump announced a 90-day pause on new tariffs for most U.S. trading partners, with the exception of China. This development contributed to a market rally, with major indices experiencing significant gains.
Trump’s Impetus
Given the scale of tariffs introduced during President Trump’s administration, many observers have questioned the underlying objectives. According to his own statements, President Trump views trade deficits as indicative of unfavorable trade relationships. However, economists widely note that United States’ trade deficits are largely influenced by the U.S. dollar’s (USD) longstanding role as the world’s reserve currency and its status as the primary medium for global trade in the post-World War II economy. The persistent global demand for dollars has generally kept the USD strong relative to other world currencies, including the Japanese Yen, Chinese Yuan, or Mexican Peso.
A strong dollar has enabled American consumers to purchase imported goods at relatively lower prices than domestically produced equivalents. This dynamic ultimately contributed to a trade imbalance, as the U.S. imports more than it exports. In turn, foreign holders of U.S. dollars have frequently reinvested those funds back into American financial markets, supporting prices of both equities and U.S. Treasury (UST) bonds. These capital inflows have, in turn, contributed to lower long-term interest rates and rising asset values, benefiting American investors and consumers.
While the trade deficit has supported access to affordable goods and contributed to economic growth, it has also been accompanied by structural shifts in the U.S. economy. In particular, decades of offshoring contributed to a reduction in domestic manufacturing employment. As a result, the U.S. economy has evolved into one that is heavily consumer-driven, reliant on global supply chains, and increasingly exposed to disruptions in international trade.
The Federal Reserve’s Role
The strength of the U.S. economy will remain the topic of debate until more data are revealed in the coming months on everything from employment figures to consumer spending and sentiment. In the meantime, investors are seeking clarity from the Federal Reserve at its next Federal Open Market Committee (FOMC) meeting on May 6 and 7. Investors are eager to hear if the Fed will cut interest rates to stave off any slowing economic effects that tariffs might have on the economy, assuming those tariffs stay in effect for an extended period of time.
As of the last FOMC in March, Jerome Powell’s group was focused on inflation, jobs, and U.S. Gross Domestic Product (GDP) forecasts. While the Fed chose to keep its Federal Funds Rate (FFR) unchanged, it did acknowledge that inflation remained a concern, while both GDP and jobs data were moving in the wrong direction. Powell’s comments following the next FOMC meeting will be scrutinized for clues as to how tariffs may have affected economic factors since April 2. If the Fed sees signs pointing to a negative outcome for inflation, jobs, and the GDP, they may cut the FFR to stimulate economic growth. There is little investors and markets like more than liquidity in the form of lower rates.
The U.S. Treasury’s Role
Given the United States currently spends approximately 6.5 percent more than it collects in revenue, the U.S. Treasury’s role in keeping the American economy moving forward is also crucial, as it directs how the nation can continue to spend in the face of ever-increasing deficits. The Treasury will announce monetary plans for issuing new debt to pay down its 6.5 percent deficit through the Quarterly Refunding Announcement (QRA). The QRA then acts as the roadmap detailing the government’s three-month plan to meet spending goals and requirements based on sales of a combination of short, intermediate, and long-term bonds. Short-term debt is a liability that matures inside of one year, intermediate in one to 10 years, and long-term in 10 to 30 years. These distinctions are important to the Treasury’s role between now and when our next debt limit expires, likely around the 2026 mid-term congressional elections.
Scott Bessent, the new Treasury secretary, favors refinancing the $9.2 trillion in U.S. debt coming due this year with longer-term obligations. This approach, known as terming out the debt, would extend repayment over a longer period—ideally at lower interest rates. Historically the Treasury has funded the continuation of debt obligations by issuing roughly 70 percent long-term to 30 percent short-term notes. This ratio, however, has been inverted since 2021, as Bessent’s predecessor Janet Yellen worked to keep long-term rates lower by selling short paper to fund U.S. government obligations. Had Yellen funded government spending from predominantly long-term notes, she would have inadvertently driven rates higher, possibly stalling the nation’s pandemic recovery. In this case, we needed lower funding rates to help U.S. businesses restart operations. At the same time, relying heavily on short-term debt helped fuel inflation. This pushed the Federal Reserve to issue more short-term debt at higher interest rates, which has contributed to the rise in 10-year Treasury yields.
Today, the choice to term out debt into longer term obligations will help to postpone principal and interest payouts on maturing bonds that come due. Before this can happen, though, longer-term rates will need to drop meaningfully from where they are today. There are two ways longer term rates come down, either by virtue of higher credit ratings or through fear when stock investors buy bonds, driving price up and yield down.
One of President Trump’s first steps toward reducing debt and strengthening the U.S. credit rating has been through DOGE, which has launched a review of spending it deems unnecessary. In conjunction, Bessent will attempt to refinance U.S. Treasury debt maturing this year. Assuming U.S. equity markets continue to sell off, we should see lower long-term yields as investors fly to the safety of the Treasury markets. Since President Trump took office, the U.S. 10-year treasury yield fell from 4.8 to approximately 3.8 percent before rebounding a smidgen. If equity markets continue their slide, and if turmoil persists, we will likely see the 10-year UST yield continue to inch closer to where Bessent would like it to be. One possible form of retaliation by holders of U.S. debt could be a sale of U.S. treasuries, which could throw a wrench into the lower yield thesis.
Market Action
It goes without saying that the impact thus far on the world’s equity markets since April 2 has been unsettling. Investors continue to look for signs that selling may be slowing, predicated largely on the hopes that the trade war will abate as the White House begins in earnest to hold calls with world leaders, negotiating tariffs and trade pacts. In the interim, we must stress the same principle we have time and again: diversification provides downside cushion in times like these. Asset prices will not go down forever, and staying invested will be important to one’s long-term goals provided you have a well-balanced portfolio composed of dissimilar types of investments. While the last few years have been tough for bond investors, the investment community is again urging investors to hold bonds in their portfolios.
Keep in mind, as difficult as the markets have been recently, they are small when compared to some of history’s more noteworthy downturns—all of which eventually resolved themselves in time. At the end of the day, market gyrations are the result of a specific reason, e.g. tariffs, which will be lifted in time. While the extent and duration will matter in terms of how much more volatility we see, normalcy will return to the markets as investors focus on earnings, sales, and other financial data.
Meanwhile, longer term valuations are in line with historical averages. Areas of the market that have long remained dormant have also awakened. This includes sectors like real estate, utilities, consumer staples and even gold, which have all begun to perform well.
What’s Next?
Understanding asset allocation is crucial for achieving specific financial goals. Recently, AAF Wealth Management made several adjustments to client portfolios in anticipation of economic changes. These adjustments included paring back tech-heavy funds (QQQM), adding a Gold Fund (GLD), the Permanent Portfolio (PRPFX), and the Dow Jones Industrial Fund (DIA). We also trimmed exposure in other more aggressive areas like small- and mid-cap names, adding to our fixed income (bond) exposure in most portfolios. All in all, these moves can help to deflect from some of the pain that has been directed at higher risk, growth centric investments.
During times like this, we also spend our time focused on small things we can do to try and make a difference in our client’s portfolios over the long term. This includes working to tax loss harvest investments, e.g., selling securities at a loss to offset the amount of capital gains tax owed on other investments, for the benefit of our clients holding non-retirement accounts, rebalancing portfolios that will provide the opportunity to buy low and eventually sell high over time. In addition, we are revisiting and rerunning financial plans with updated figures to assess what changes to saving, spending, and investing might be in order for clients.
Clients are encouraged to reach out to their AAF Wealth Management Wealth Advisor with questions or concerns.. It’s one thing to say, “Don’t worry. You’ll get through this.” It’s another entirely to live that truth when all you see are deep red numbers day after day. A large part of what we do as investment advisors is help clients see the broader picture and avoid the traps most investors succumb to during tough periods.
If you have questions, please contact Kevin P. Hodson, CMT, CAIA, AIF® at 774.512.4173 or khodson@nullaafwealth.com—or your AAFCPAs Partner.
AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.
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