At the close of 2024, diversification was a taboo topic that few wanted to discuss. With the magnificent seven stocks and the S&P 500 experiencing significant gains, the idea of investing in other asset classes was largely dismissed.
However, just three months later, the conversation has shifted dramatically. Domestic stocks lost value in the first quarter of 2025, while foreign stocks and non-traditional assets experienced an increase. The most notable gains were in foreign developed stocks, commodities, and global infrastructure, which rose by 6.9%, 8.9%, and 7.3%, respectively.
There are various methods to measure the U.S. dollar against other currencies. One common approach is the U.S. Dollar Index, which evaluates the dollar's value relative to the Euro, Japanese yen, British Pound sterling, Canadian dollar, Swedish krona, and Swiss franc. Last fall, the U.S. dollar surged as we approached the election and continued to rise through early January. However, recently, as foreign relations and trade tensions have escalated, the dollar has reversed course.
It's important to remember that when the U.S. dollar rises, it negatively impacts investors holding foreign securities, whereas a falling dollar benefits these investors. In the fourth quarter of 2024, the dollar rose sharply, contributing to an 8.1% decline in foreign developed stocks. Conversely, in the first quarter of 2025, the U.S. dollar began to retreat, which helped foreign developed stocks rise by 6.9%.
China has intensified its efforts to boost domestic demand in response to potential new shocks to overseas demand. The government has announced an overall increase in spending, raising the budget deficit from 3% to 4%, the highest level since 2010. This spending increase includes wage hikes for millions of government workers, which is expected to stimulate domestic consumption. Additionally, China is expanding its consumer goods trade-in program to cover more home appliances and electric cars, further encouraging domestic spending. To support the real estate and banking system, Beijing is allowing increased issuance of state and local government bonds.
Meanwhile, the European Commission has proposed allocating up to 800 billion euros for European defense and readiness, including a plan to borrow up to 150 billion euros to lend to national governments. This proposal comes amid doubts cast by U.S. leadership on NATO mutual defense clauses. Notably, Germany has recently passed a major reform to its constitutional debt brake, unlocking billions of euros in funding. Ultimately, trillions in investments could be committed across Europe, providing a substantial fiscal stimulus for those economies.
Although this newsletter primarily focuses on the first quarter of 2025, it is hard to ignore the tariffs announced on April 2nd.
While the administration may have taken some liberties with the calculations used to determine the tariffs charged to the U.S.A.—calculated as the trade deficit with a particular country divided by the value of that country’s exports to the U.S.—there are clear trade discrepancies between our country and our trading partners. It is evident that the tariff increases announced this week for our largest trading partners were significantly larger than expected. When combined with other substantial changes to immigration, fiscal policy, and regulation, it is a lot for businesses, consumers, and investors to digest.
There is significant debate on how this process is unfolding, and many believe these changes may significantly alter the global structure we have become accustomed to since the end of World War II. For decades, the U.S. has pushed to expand democracy, promote free trade, and influence the global financial system. Along the way, business profit margins have benefited from cheaper overseas labor, consumers have enjoyed cheaper goods made abroad, the dollar became the world’s reserve currency, and other nations financed our government deficits.
Given the significant impact of these changes, it is crucial for investors to remain focused on their long-term goals and objectives, maintain an appropriate level of liquidity for their near-term needs, and avoid any impulsive reactions that could be harmful to their financial health.
Over the past several years, many investors have looked to the Federal Reserve for help when there was distress in the financial markets. We have to remember, however, that the Federal Reserve has a dual mandate: maximum employment and price stability.
In a speech on April 4th, Chair Powell had a few comments on the subject:
Lastly, and perhaps most importantly, during the question and answer portion of his presentation, Chair Powell stated that “Inflation is going to be moving up and growth is going to be slowing, but… it is not clear to me at this time what the appropriate path for monetary policy will be and we’re going to need to wait and see how this plays out before we can start to make adjustments.”
Given his comments, it is unlikely that the Federal Reserve will cut interest rates soon to stimulate the economy or the stock market.