Gill Capital Partners March 2025 Market Update
As we move into March, we are excited for daylight savings, March Madness, and warmer days. Volatility is back amidst a chaotic and rapidly developing economic and geo-political backdrop. Equities are in correction mode as continued uncertainty around tariffs and deteriorating fundamentals are spooking consumers, businesses, and markets. We will provide updates, as well as our view, on economic fundamentals, tariffs, interest rates, and markets. Before we do, however, what in the world is going on with the price of gold?
As shown in the chart below, gold recently recorded a new all-time high price on February 20th of $2,954/oz, up over 35% in the past year.
It might be time to dust off grandma’s gold jewelry you’ve been saving. Gold has historically been viewed as a hedge against inflation, but over the last decade, has transformed into a general hedge. As of late, gold prices have benefitted from geopolitical tensions and the perception of heightened economic and financial market risk.
To put it simply, when investors get spooked, some move into gold.
Our view – With the heightened uncertainty in markets, it makes sense that gold is moving higher. We do not typically have direct exposure to gold in our portfolios, as we view it as a “non-productive asset.” That is, it does not create earnings or cash flow, and we prefer to hold productive assets. With cash yields in the 4.5% range and bond yields even higher, we would prefer to hold these assets for defensive purposes rather than gold. That being said, kudos to all of you gold investors out there - it has been a good year.
Tariffs
Significant new tariffs were announced Tuesday for Canada, Mexico, and China. Some of these have already been placed on hold as negotiations are ongoing. All of these countries have responded with retaliatory tariffs on goods exported from the U.S.
Our view –We continue to believe that the Trump Administration is utilizing tariffs to quickly bring these nations to the negotiating table, although the exact nature and desire of the negotiations unclear. The situation is extremely fluid, and most or all of the proposed tariffs may be off the table shortly. However, at this point, damage is being done in real-time across the economy. Businesses are pulling back on hiring and capital expenditures due to a lack of clarity about the business environment and potentially skyrocketing supply prices. This creates a general sense of uncertainty for businesses and consumers, prompting delays in major spending decisions. This is reflected in the sharp pullback noted in February in the Philadelphia Fed CapEx forecast (below).
Consumers and businesses are now concerned about a reacceleration of inflation due to trade wars at a time when the economy appears to be slowing. We hope that a quick resolution can be reached and tariffs do not have a long-lasting impact on growth.
Fundamentals
We have always placed importance on fundamentals over headlines and will continue to do so. We are seeing some cracks forming in the fundamentals, and some potential bright spots as well. It appears the moves on tariffs, combined with accelerating government layoffs and spending reductions, have begun to funnel into the fundamentals. Let's take a look at what we are seeing.
Jobs & Consumer Spending – We received multiple updates on the labor market this week:
The ADP jobs report for February showed an increase of 77,000 private sector jobs; this was lower than economist expectations of 170,000 new jobs for the month. ADP’s chief economist attributed the slower month of job creation to policy uncertainty and a slowdown in consumer spending.
Outplacement firm Challenger, Gray & Christmas reported that U.S. employers announced 172,017 layoffs for the month, up 245% from January, the highest monthly count since July 2020, with more than a third coming from federal job cuts.
The widely tracked February BLS jobs report offered few surprises for investors, showing that 151,000 new jobs were created in the month of February, slightly below the 160,000 expected by economists. The report also reported that the unemployment rate rose to 4.1%, slightly above expectations.
Our view – We have said for months that despite various macro headwinds, from inflation to global conflicts, as long as the unemployment rate remains low, consumer sentiment will remain strong, and this will propel both consumer and business spending. Given the issues discussed above, particularly a less certain employment picture, consumers are starting to feel less confident. This is shown in the following graph:
When consumers feel less confident, they spend less money, which impacts corporate profits and creates a negative feedback loop. We are closely watching the employment picture, along with the health of consumer and business spending. The three reports, taken together, show a slightly mixed but softening jobs picture. We are anticipating further weakening over the next 3-6 months as the impact of federal worker layoffs shows up in the labor reports. While these indicators are not yet signaling an imminent recession, they are red flags.
Corporate Earnings – In the fourth quarter of 2024, 74% of the companies in the S&P 500 reported earnings that exceeded estimates, marking the sixth consecutive quarter of earnings growth and the highest rate since Q4 of 2021.
Our view – Q4 corporate earnings were robust as a whole and drove equities to new all-time highs in many indices. However, we are seeing CEOs temper their future guidance based upon uncertainty around tariffs and other policy changes. Corporate earnings have been a consistent source of strength. That said, we are likely to see some level of disruption due to the tariff situation, though it remains unclear to what extent. We anticipate further tax reform both for corporations and individuals to easily pass through Congress, which will be a tailwind for corporate earnings and potentially the markets as well.
Interest Rates & The Federal Reserve
Interest rates have moved lower as of late with a flight to safety, and markets are once again pricing in more rate cuts this year. As of this writing, the market is now anticipating 2-3 rate cuts by the end of the year. The Federal Reserve's next meeting is March 18-19. They tempered the forecast for rate cuts at their last meeting, citing continued risks from inflation.
Our view – The Fed is caught in a tough spot at the moment; growth expectations are coming down and the labor market is softening, yet inflation expectations are reaccelerating, largely due to the tariff situation. As shown in the graphs below, the market is betting on inflation reaccelerating over the next 2 & 5 years.
Interest rates have moved lower over the first two months of 2025. The interest rate on the 10-year U.S. Treasury is approximately 0.50% lower than it was at its peak in early January. This move has coincided with a move lower in equity markets and investors seeking the safety of bonds. While interest rates may be moving lower due largely to the expectation of deteriorating economic conditions, they will be a welcome sight for many sectors that have been adversely impacted by higher rates. If you are searching for a positive takeaway, this is it: stocks, real estate, and capital markets love lower rates, and they may not have to wait as long as they thought to see them materialize.
Conclusions & Portfolio Updates – We continue to rebalance portfolios to align them with their long-term targets and provide investors with proper diversification. We are taking advantage of higher yields to purchase high-quality fixed income. We continue to believe in the power of diversification and that the discipline to stay invested leads to better long-term performance. We understand that the tone of this market commentary may not be overly reassuring, but we seek to provide you with the facts. The long-term future remains bright, but investors should be prepared for some near-term bumps. We are always available to discuss markets, investments, or our March Madness favorites.
As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance, or estate needs.