Market Compass video series

Hello, everyone. And welcome to the April Market Compass. There have certainly been no shortage of headlines to digest. And the market and trade narrative have been shifting rapidly. In today's Compass, we'll discuss the near-term and then zoom out to provide some perspective on long-term investing.

First, I'll walk through our views on the recent tariff update and implications. And then take a step back to talk more broadly about some long-term principles of investing. These are particularly important to remember as we go through periods of market volatility and uncertainty.

So where do we stand on tariffs and trade? As of mid-April, the White House announced a 90-day reprieve on tariffs, moving tariffs to 10% on most partners, while hiking tariffs on Chinese imports to around 125%.

Now, keep in mind this pause does not apply to sector-specific tariffs, including autos and steel and aluminum. So what does this mean for markets and investors? Despite the tariff reprieve, tariff rates are still set to move substantially higher in the US.

Given the 10% baseline tariff combined with the 125% tariff on our third largest trading partner, China, and sector tariffs, this still leaves average US tariff rates close to 20% up from about 2% pre-liberation day.

However, despite the rise in tariff rates, the administration is indicating that negotiations will continue across multiple economies, potentially including China. So while uncertainty remains, perhaps the worst case scenario on tariffs is off the table. Nonetheless, higher tariff rates do act as a tax on consumers across many goods. We would expect prices to rise and economic growth to soften in the months ahead.

According to a 2018 Fed Model, the higher tariff rates could impact GDP growth by 2.4 percentage points and inflation by 1.4 percentage points. We'll also be hearing from corporations during earnings season whether tariffs have impacted their ability to plan, spend, make deals, or hire.

Now I've mentioned some of the uncertainty that comes with the escalation in tariffs. But are there any mitigating factors? Well, I'll highlight three potential ones. Number 1, economic growth in the US started from a position of strength. This is a much better position to be in versus had tariffs come when the economy was already weakening.

In fact, Q4 GDP in the US was a healthy 2 and 1/2%. And we know the labor market remains relatively healthy and even inflation has been contained over the last few months. Number 2, the Fed has scope to cut interest rates this year.

Now while the Federal Reserve will be mindful of higher prices and inflation that come from tariffs, they will also be watching economic growth and the labor market closely. If there are signs of deterioration, we believe that the Fed will be poised to cut rates. Perhaps, two to three times this year.

Now this is more likely to happen in the back half of the year when the impact from tariffs becomes more clear. And number 3, tariff revenue may be used to support pro-growth policies like tax reform. Now while the focus of the administration has been tariffs thus far, we may start to hear more about pro-growth policies like tax reform and deregulation.

If the administration can extend the 2017 tax cuts, which expire at the end of this year, this may provide some fiscal support to the economy as well. Also, the shift in narrative from tariffs to tax cuts and deregulation may be supportive of market sentiment as well.

Let's zoom out and remind investors of an important tenet of long-term investing, especially as we navigate uncertainty and volatility. And that is, time in the market is generally a better approach than trying to time yourself in and out of the market.

Now as markets move lower and pull back, some investors may be feeling understandably nervous and may want to sell assets. Now keep in mind, if you do sell, you then have two decisions to make, when to sell and when to buy back in. And it is, of course, notoriously difficult to time market tops or bottoms.

Now another way of looking at this is the missing the best days chart. As seen here, this chart shows that if an investor had bought $10,000 of the S&P 500 30 years ago and just held it without buying or selling, their portfolio value would be about $224,000.

However, if they had missed just the 10 best days in the market over that 30-year period, their portfolio value gets cut by more than half and it gets worse the more best days that are missed. Now our analysis showed that many of the best days in the market occur during periods of crisis. Like the pandemic, the financial crisis, or even now during tariff uncertainty, where we recently saw a historic market rally after the pause in tariffs was announced.

So while some may be tempted to sell investments or exit during the market volatility, remember that you also risk missing some of these best days that could have a meaningful impact on your long-term returns.

Now with that, thank you for joining me today as we discussed both the near-term implications of tariffs and some thoughts on long-term investing as well. We look forward to seeing you back here next month for the Market Compass.

Hello everyone. And welcome to a very special Market Campus edition. Now, what we thought we'd do today is walk us through what's been happening in markets. As we know, it's been a volatile year thus far, but certainly so over the last couple of weeks. Now, the good news is we did see on Wednesday, April 9th a nice one-day, a very sharp rally in the markets.

We've given a little bit of that back. And uncertainty still is the name of the game. But we thought today what we do is walk us through what happened on Wednesday, April 9th and what our views are going forward. Then what we thought we'd do is maybe take a step back. We know long term investing is important, especially as you're going through periods of market volatility.

So let's dig right in and see, where we are today and what's on the horizon.

First and foremost what sparked this market rally that we saw on Wednesday April 9th. Well, what we know, of course, is that the white House had announced what they were calling a 90 day pause for most of their trading partners.

And what that really meant was tariffs were moving to 10%, primarily across the board, although tariffs on China remain in place at 145% effective immediately. Now keep in mind this pause does not apply to sector specific tariffs. And it also still includes auto and steel and aluminum tariffs. Now of course the tone did shift on Wednesday April 9th.

We did get that nice reaction in the marketplace.

But keep in mind, given that 10% baseline tariff across most economies, combined with 145% tariff on our third largest trading partner, and of course our sector tariffs still in place, this does leave the average U.S tariff rate still close to 20%.

And that's up from about 2% pre liberation day. Now of course the administration is signaling that negotiations may continue even perhaps with China. And that's what helped spark that sharp one day rally. We saw. Now uncertainty does remain. But the good news is of course, is that perhaps the worst case scenario for tariffs is off the table. Now, of course, what we did see in that relief rally, followed by a little bit of give back.

But that one day rally was pretty historic. The S&P 500 was up 9.5%. The Nasdaq was up nearly 12.2%, the biggest gain since 2001. We saw commodities like oil bounce back and we also saw volatility indexes move lower. So perhaps a sign of some global relief as well. Now keep in mind what really is the theme of this market continues to play out which is that volatility is likely with us for some time.

Perhaps as we get even more clarity around the tariff situation and perhaps as we then go towards, areas like tax reform and deregulation, some more pro-growth policies that may be coming. So really, you know, what happened during that one day and where are we year to date? So what was nice to see, of course, that one day rally in the S&P 500, if you look at it from a sector perspective, you did see some of the most beaten up parts of the market outperform.

So areas like technology, discretionary comm services really led the way higher. And the laggards on that day were really the parts of the market that were more defensive. And maybe, those of you you'd see perform well in a risk off environment. So areas like healthcare staples, utilities. Now keep in mind though, on a year to date basis, the S&P 500 is still down 7 to 10%.

And in fact, the outperformers are those more defensive sectors of the market. So staples, healthcare, utilities, even areas like financials and energy are outperforming, especially when you look at them compared to areas like technology and discretionary. And keep in mind, in the US, consumer discretionary includes Amazons and Teslas of the world as well.

So, you know, we talked a lot about what's happening in the near term in the markets, whether it's tariffs or volatility. But I did want to take a quick step back and look at, what's happening over the long term and why it's important as a long term investor to stay invested. And this is one of our tried and true favorite charts.

The Missing the Best Days chart really actually, came into the forefront even over this last week. So what this really shows is, time in the market is better than trying to time yourself in and out of the market. And if you had invested $10,000 in the S&P 500 in 1995, so about 30 years ago and just left it there, didn't trade in and out.

Your portfolio value today would be about $224,000. Now, if you had just missed ten days, ten of the best trading days over that 30 year period, your portfolio value gets cut in half and there's more damage done the more best days you miss. And really, what this shows is if you try to time yourself in and out of the market, if you try to get out of the market and then get back in and you happen to miss some of those best days, like the one we saw just this week, your portfolio returns can really be impacted.

Now, it's also interesting here. The analysis we ran shows that a lot of those best days tend to occur during crisis period. So think about the tech bubble, the financial crisis, the pandemic. We saw a lot of those best days. Think about even this week where we're in this the midst of this volatility. We saw a 10% move in the S&P 500 in 1 day.

And so missing those best days, does have impact on long term returns. And the tough part is those of us that feel like selling out or making emotionally driven investment decisions, they could be doing so in the midst of a crisis and in the midst of a period of a best day occurring. So, the lesson really is time in the market versus trying to time yourself in and out of the market is the safer approach and is a better approach for long term returns.

And with that, I wanted to thank you for joining us today. I know it's been a volatile time in the markets, but remember to think long term. Remember to use some of this volatility as an opportunity, whether it's rebalancing, whether it's diversifying, whether it's just adding quality investments at better prices. We think that strategy, keeping a calm head, not making emotionally charged investment decisions, will be the best approach to maximize returns over a longer term horizon.

So thank you everyone. See you right back here on Market Compass.

Hello everyone! In light of the market volatility, we wanted to share a few thoughts. First of all, market setbacks are not new, and one doesn't have to go back far enough in time to realize that we've been here before. Just the last five years, you all have successfully navigated the fastest bear market in history. Following the pandemic in 2020.

In 2022, again, we had another bear market, one that was more prolonged as inflation spiked. The fed also rushed to aggressively hike interest rates, and we all lived through the deepest bear market in bonds. Now, the recent version is tariffs and trade uncertainty that are driving the sharp pullbacks. That has played out over the last couple of trading days.

What is driving markets is the newly announced sweeping tariffs by the U.S. administration that were higher, that most investors expected. We have 10% tariffs on all imports that took effect on Saturday, April 6th, and higher tariffs on 60 countries that the US has the largest trade deficit. With that going into effect on April 9th, together they are projected to push the average tariff rate to almost 25% from about 2%, which would be more than a 100 year high in terms of what's next.

Some countries will choose to retaliate. China has taken out that approach, while others are now trying to negotiate. Japan is in the latter camp, and according to Treasury Secretary Beset, Japan is expected to get priority in the trade talks. The hope is that the proposed high tariffs will represent the ceiling and can be negotiated down from here, but uncertainly will likely remain high.

While all this is playing out. From an economic perspective, tariffs pose upside risks to inflation and downside risks to economic growth as they may act as a tax on the consumer. They may also pressure corporate profits via higher input costs and slower demand. But there are buffers. So let's call them mitigating factors. First and foremost, the U.S. economy is facing this period of uncertainty from a very strong starting point.

Whether we look at consumer finances, corporate balance sheets or the labor markets all point to healthy conditions, and we do not see any major imbalances or excesses in the economy like in 2008. That would trigger a more prolonged and deeper financial crisis or a downturn. Another important point to note is that we've been driving. What has been driving markets is all policy driven, and most likely the policy agenda from the administration may soon shift to pro-growth measures.

A lot of the focus early in the year has been on trade and efforts to constrain government spending. However, the administration may start pivoting to more market friendly policies like tax cuts and deregulation, which are taking longer to implement. Next, unlike the bear market in 2022, the fed remains in a rate cutting cycle and could step in to cut interest rates more aggressively than expected.

If there is a notable uptick in unemployment, they've already told us that they are inclined to see any tariff induced price increases as a one off or transitory. And then lastly, we hear a lot of talk about an upcoming recession. While certainly the risks have increased. A recession is not inevitable. Markets have already priced in a significant degree of downside, in our view.

On the graph. You can see that based on the S&P 500,  17.5% decline from the highs. That implies a 60% chance of a recession based on how stocks have behaved during past recession periods. We can go through the same exercise for small cap stocks, and that implies an 84% chance probability. The point here is that stocks are starting to get priced for an outcome that may not materialize.

Elevated valuations was one concern coming into this year. Well, the upside of a down market is that valuations are now looking more compelling. All major indices are trading below their ten year historical averages. When looking at the price to earnings ratio, even the Nasdaq that includes a lot of the Mega-cap technology companies has flipped from trading at the premium to its history to trading at a discount.

Mid-Cap stocks continue to look attractive to us and offer a nice balance between quality and that catch up potential due to large caps. One key takeaway looking at how markets have behaved over the last trading sessions is that investors that own various asset classes, those that are diversified, have fared better than some of the main averages. So diversification has helped portfolios better weather the storm so far.

So far, this year's performance is exactly why the portfolios that we recommend don't just include the S&P 500. We have allocations to 13 asset classes that include Mid-caps international, even emerging market debt, among other asset classes. While the Magnificent Seven group of companies have turned from leaders to laggards, international equities are still lower but have outperformed, and investment grade bonds are up year to date, providing that balanced portfolios and offset to equity market volatility.

You can also see our portfolio objectives that are based on our strategic asset allocation guidance and how they are performing. Most are down, but not nearly as much as the S&P 500 or a simple benchmark mixing US stocks and bonds. Pivoting to some interesting observations from the recent market action, we look at the so-called fear index, or VIX, which the higher the index, the more volatile markets are.

And what you find is that it's been only eight times over the past 35 years that this index, the VIX index, has been as high as it is now. After we cross that threshold the three standard deviation threshold, which you can see on the graph forward six and 12 month returns tend to be very strong. On average it takes a while for volatility to return back to normal about eight months.

But what we find and what history shows is that fear creates opportunities. As Warren Buffett has famously said, be greedy when others are fearful, and be fearful when others are greedy. And that's exactly what historical data show. Another interesting stat looking at Thursday and Friday last week after the April 2nd tariff announcement, combined the performance for these two days was the fourth worst in the S&P decline since World War two.

Past episodes included Black Monday, the pandemic and the financial crisis in 2008. During these extreme sell offs, returns have been consistently positive across various time frames. Of course, there's no guarantees, but after what has transpired in equity prices, possibly a lot of the bad, a lot of bad news are in the price. To conclude, I would like to offer some investing rules of the road, some guidance to think long term, but also navigate the here and now, starting with a focus on what you can control in this environment.

Patience will be critical to navigate all the headline noise and announcements. It is very important to avoid making emotional decisions, which we know based on results. They tend to lead to subpar outcomes. There's a study. It's called the Dalbar Study that shows the returns achieved by the average investor versus the benchmark. A lot of the mistakes investing mistakes happen when investors are trying to time the market, and they tend to get out at the wrong time.

And lastly, it helps to understand the risks of not investing. If you have long term goals that you want to achieve to make this statement more tangible and real. Assuming 3% inflation prices will double during a normal 25 year retirement period. So it is very important to own assets that can help you maintain your purchasing power over time.

For more personalized advice and guidance on how to navigate the market pullback, please consult your Edward Jones financial advisor.

What I thought I'd do today is first, walk us through a little bit of what's happening in the markets today. So, where do we stand in terms of markets? Well, as we know, as of Friday, the S&P 500 did pull back 17% from its February 19th peak. But keep in mind, more broadly, over the last two year period since this bull market began in October of 2022, the S&P is still up about 35%.

And that's despite this recent bout of volatility. So still a pretty strong market for those who have been participating over the last couple of years. Now, what are we seeing driving this volatility and especially the most recent set of drawdowns? And are there any mitigating factors or a few things to keep in mind. First, we did see last week, of course, the administration proposed a new tariff regime that is set to go into effect this Wednesday, April 9th.

And that will bring the average tariff rate up from about 2.3% in the US to about 20 to 25%. So that is really the highest level in about 100 years. This had far exceeded even some of the most bearish forecasts for what direction the tariff regime could go. Now keep in mind there was some chatter of a 90 day pause that is still in wait-and-see mode.

There has been no confirmation of that yet, but we'll be watching for that closely. Secondly, we know tariffs will act as a tax across primarily consumer goods, and they'll likely raise prices and potentially slow economic growth. Now, we ran some numbers based on a 2018 Federal Reserve model that suggested a potential 2.4 percentage point hit to U.S. growth and a 1.4% digit point rise in prices or inflation.

Keep in mind, the US economy came into the year with about the expectation of a 2 - 2.5% growth rate. So growth could slow to flattish. We have not yet seen signs of a recession on the horizon. Although the probabilities may be rising there. Now, of course, as we go through this process, some countries, as we know, may choose to retaliate.

We certainly saw that news out of China on Friday, where they did retaliate with 34% tariffs of their own. But other countries may choose to negotiate. The administration certainly has been pointed...pointing to tariffs as a long term approach, less so of an ongoing negotiation. But perhaps the peak of tariffs is now what we have in front of us.

And we could see tariff rates move lower broadly from here. Of course, uncertainty still remains elevated, which is why we're seeing this volatility. And that does make the operating backdrop challenging still, especially for corporations looking for answers. Now are there any mitigating factors? I know we laid out a somewhat, dim outlook with excess tariffs and slowing growth and potentially a rise in inflation. Well, I’ll point to a few mitigating factors.

First and foremost, the US economy did start from a position of strength. Now, that is a much better starting point than had we been already slowing and potentially on the cusp of recession already. In fact, GDP momentum was pretty strong coming into the year 2.5% growth last quarter. We of course even got a jobs report last Friday which showed a pretty healthy growth rate, 230,000 jobs added versus an expectation of 140.

Unemployment rate still resilient at 4.2%. Second point I'll make here on mitigating factors is of course, the fed. And this one is still an ongoing, question mark as well. But generally speaking, even though the fed is faced with potentially higher inflation and lower growth, they have indicated that they may be able to and willing to look past the higher price levels if they start to see a meaningful deterioration in growth or the labor market.

Now, markets are now pricing in 4 to 5 rate cuts. We still think 2 to 3 may be reasonable, but keep in mind that likely won't happen until the June meeting. As we get an ongoing set of economic data in the months ahead. But nonetheless, we think the fed is still poised to cut rates in 2025.

And then, of course, the administration has been talking about potentially using the tariff ri[...] revenue to support, tax cut or at least extending the tax cut and Jobs Act. And we'll probably hear more on pro-growth policies in the weeks ahead, especially as that debt ceiling negotiation starts back up again. So perhaps first half of the year focused on tariffs.

Second half we could see more focus at least on areas like tax cuts and deregulation. So of course while we may be facing a bear market, we did want to look back and and share some data on how bear markets have performed and how they can be opportunities. So this chart basically shows since 1970 we have actually seen eight bear market periods, with 20% drawdowns or more.

And in fact, if you look at the one month, six month and 12 month periods following these bear markets, we actually see positive results across almost every period here. And as I've highlighted here, there are two that actually two bear markets that were not accompanied by a recession, perhaps similar to where we are now. And in fact, the 12 month performance after those bear markets was higher on average than the broader 12 month performance.

So yes, it feels like there's a lot of volatility now. But keep in mind markets are a forward-looking mechanism. And we will always start thinking about how corporations can adjust, how earnings growth will follow and how returns may recover as well. Also wanted to highlight that theme of diversification, which we mentioned upfront. Now keep in mind of course a lot of focus on this part of the global markets.

The Mag 7, small caps, Nasdaq - all down 15 to 20%. But there are parts of the market still holding up relatively well. And as you can see here, bond markets across the board are still positive, including U.S. Agg, Canadian bonds are higher. U.S. high yield is even, slightly positive year to date. Of course, international markets still remain somewhat positive.

They are taking more of a hit given the outsized tariff proposals that were put in place last week. But nonetheless, they have provided a nice, source of balance in portfolios this year. I'll also mention, the S&P Equal Weight index which actually equally weights both growth and value parts of the market, that is underperforming less so than broader equity market indexes.

And to that point, if we take one layer deeper look at what the S&P 500 is doing. Of course, we do see sectors that are positive year to date, primarily the defensive sectors, staples, utilities, healthcare still showing positive performance. And of course, the areas that are really meaningfully underperforming are those parts of technology. So tech, consumer discretionary, and comm services.

So again underscoring this point that diversified portfolios, if you had a mix of equities and bonds, or if you had some international parts of the market in your portfolio, you're probably doing better than the overall market. Just some upcoming dates to watch. I know we're all looking for potential sources of volatility, but catalysts. April 9th, as I mentioned this Wednesday, is when the tariffs are supposed to be implemented.

More to come on, whether that gets postponed or not. We have some interesting economic data in the days ahead as well. Inflation report also on Thursday. Earnings season begins on Friday. This week we'll be hearing from corporations, especially how they're viewing and how they're adjusting. We'll get a first look at Q1 GDP in the end of April. And the next fed meeting is on May 7th.

That's where we'll really be watching and listening to Jerome Powell, how he's thinking about the weeks and months ahead. And then, of course, we should start hearing a little bit more about that debt ceiling debate, but hopefully also a focus on how we're going to get growth back into this economy.

Hello, everyone, and welcome to the March Market Compass. We are now three months into 2025, and so far, there's been no shortage of headlines. Driving markets, trade policy uncertainty, and signs of an emerging soft patch in the US economy have taken some wind out of the market's sails.

US stocks are still about 10% higher from a year ago but have given back some gains, and volatility has increased. But along with volatility, diversification has also made a comeback, which is good news for those investors that own a diverse set of investments. In this Market Compass episode, we'll provide some perspective on the rotations or changes in market leadership that are underway. We'll discuss what is changing and why it matters for investors.

A key theme this year is the broadening of market leadership, with several rotations taking place at the sector level, investment style, and across geographies. But before we dive into these rotations, let's take a step back and consider the macroeconomic backdrop and how it is evolving. Over the past two years, we've had several quarters where the US economy grew more than 3%, faster than its long-term potential, which is thought to be about 2%, and faster than other major economies.

The US consumer has been the main driving force, aided by excess savings and solid income gains. Government spending has also boosted growth but led to high deficits. In the private sector, the launch of ChatGPT back in late 2022 fueled a wave of excitement around artificial intelligence. So plenty of tailwinds have helped drive two back-to-back years of more than 20% gains per year for US stocks.

Now, a lot of this support still remains, but the bar of expectations has risen, making it harder to exceed it, which is why markets have been mostly rangebound over the past six months. On the growth side, the US economy is likely going through a soft patch early in the year. Weather is one factor which likely depressed activity in parts of the country.

Additionally, trade policy uncertainty has negatively impacted consumer and investor sentiment. There is also an effort to constrain government spending in the US, while fiscal efforts are ramping up in other countries. Lastly, competition for artificial intelligence seems to be increasing, turning investors more skeptical about the pace of investment spending from megacap technology companies.

One of the most obvious rotations is happening within the different sectors of the S&P 500. A lot has been said and written about the Magnificent Seven group of companies. That is Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla. These companies comprise about one third of the S&P 500 weight and have contributed more than half of the index gains in the past two years.

But the group has lost some of its luster, with six of the seven companies lagging the S&P so far this year. Profits for the group remain strong but are slowing after two years of explosive growth, while profits for the S&P 493, the rest of the index, are accelerating after a two-year lull.

Reflecting these changes, we've seen the energy and health sectors emerge as new leaders. And more broadly, eight of the 11 sectors are outperforming the S&P, with only the growth sectors-- home services, technology, and consumer discretionary-- down for the year.

Given these sector rotations, performance for investment styles has also flipped. The gap between growth and value is starting to narrow, with value outperforming. Value-style investments trade at lower valuations, are less exposed to trade uncertainty and could benefit later in the year from pro-growth policies that are likely coming.

International stocks have lagged US stocks in eight of the past 10 years, with 2024 marking the largest underperformance since 1998. But the tide appears to be shifting, with international stocks off to a very strong start this year. Germany's economy has stagnated in recent years. However, following the German elections in February, the historically fiscally conservative country appears to be making a major pivot in its policy, proposing a massive stimulus program to boost defense and infrastructure spending.

These proposals, if approved, have the potential to improve the growth outlook for the country and the region. And it's not only Europe that is showing signs of life. Looking further east, low-cost artificial intelligence models in China and the government's changing stance towards the private sector have triggered a rally in technology stocks there, as well.

We are hesitant to pound the table that the year-to-date rally in international stocks is the start of a new trend. However, the brightening outlook and wide valuation gap with US equities argue that now is a good time for investors to review their international allocations. A 70% US, 30% international equity portfolio five years ago would have drifted to a 78%, 22% international today. Rebalancing that portfolio would mean selling some domestic stocks and buying international equities to return to the intended strategic allocation.

Policy uncertainty and trade worries are a known, unknown at this point and may keep volatility elevated in the months ahead. Given the rotations that are underway, we think that portfolio diversification will be critical for investors to navigate this year's twists and turns. Historically, stocks have experienced a correction, defined as a 10% or more decline from highs, about once a year. But any pullback doesn't have to turn into something worse.

The private sector continues to add jobs at a healthy pace. Corporate profits are rising, and the Fed is not considering rate hikes anytime soon. Investors can consider rebalancing strategies and dollar-cost averaging to take advantage of the wide price swings that we are seeing. We recommend connecting with your financial advisor to develop an investment strategy that is tailored to your long-term goals. Thank you for watching, and we'll see you right here next month.

Hello, everyone, and welcome to the February Market Compass. It has certainly been an eventful first couple months of the year. Despite some volatility and uncertainty, markets have performed well.

The S&P 500, for example, which is often considered a proxy for the broader US stock market, is up about 4% as of mid-February. Now, underneath the surface, we have seen a broadening of market leadership beyond mega-cap technology with areas such as financials, energy, industrials all showing leadership. We believe positive market returns reflect an economy that continues to remain resilient and show signs of momentum.

Now, the uncertainty around tariffs do remain an overhang and could be a source of volatility and even higher prices and lower growth. However, barring a recession or Federal Reserve rate hikes, neither of which we see ahead, we continue to see market pullbacks as opportunities to diversify, rebalance and add quality investments. In this Market Compass episode, we'll look at market performance thus far in 2025, and talk about some of the positive drivers of the economy, as well as some sources of uncertainty, namely tariffs and trade. So let's dive in.

First, let's look at US stock market performance thus far this year. Now, the S&P 500 is up about 4% as of February 13, and sector leadership has broadened. Areas such as financials and health, which do well when the US economy is growing, are outperforming, and the technology and consumer discretionary sectors have lagged thus far this year with some US mega-cap tech names underperforming. We believe this theme of diversification and broad leadership will continue in the year ahead.

Now in the bond market, Treasury yields have come down from their highs but remain elevated versus recent history. Given the uncertainty around inflation and tariffs, yields have moved higher, especially as markets have priced in future Federal Reserve interest rate cuts. Higher yields generally mean lower bond prices. But for savers, long-term investors, and those nearing retirement, elevated bond yields can be a good source of income. We continue to see opportunities in the investment grade bond market to extend duration and invest in higher quality bonds.

After two years of double digit returns in US stock markets, what's driving continued positive returns this year? Well, in our view, the fundamental backdrop remains supportive, which underpins this bull market. Economic growth has been resilient. The Fed's GDP Now Forecast, for example, points to a healthy 2.9% annualized economic growth rate for the first quarter of 2025, a good sign that momentum is continuing this year. And corporate earnings continue to deliver.

We see them growing by double digits this year as well, driven by contributions from both growth and value sectors, which should support stock market returns. And finally, the labor market has been an ongoing source of strength for the US economy. Now, keep in mind, when households feel confident in their jobs and the job market broadly, they're more inclined to consume.

The US unemployment rate remains at 4%, well-below the long-term average of 5.7%. And wage growth, while elevated at about 4%, continues to outpace the rate of inflation. This means employees are bringing home positive real wages, also good for households and consumers.

Now, perhaps the biggest source of uncertainty for markets and risk to economic growth is the tariff and trade policy. An escalation in tariffs on one or more economies not only would weigh on consumer and market sentiment, but also could increase prices and put downward pressure on economic growth. In fact, Fed research suggested that US tariffs during 2018 and 2019 contributed to an increase in inflation by 0.1% to 0.3% and reduced economic growth by 0.3% to 0.5%.

Now, the impact could be larger this time, as the scope of tariff actions is potentially broader. However, we do see some mitigating factors when it comes to tariffs and trade. We'll highlight three today.

First, tariffs may be viewed as more of a negotiation tactic than a shift in trade policy. We saw some signals of this when tariffs on Canada and Mexico were put on hold, after these countries agreed to enhanced border security. Now, while this approach may still cause uncertainty and headlines, the long-term economic impact is more contained.

Second, the US is a relatively insulated economy when it comes to trade. In fact, when you look globally at trade as a percentage of GDP, the US ranks towards the bottom, at 25% versus 64% for Canada and 74% for Mexico. Now this implies that tariffs may impact US trade partners more so than they hit the United States.

And third, while the US administration may begin with tariffs, keep in mind that pro-growth policies, including deregulation and lower taxes, as well as cost-cutting initiatives, are also on the agenda, likely coming in the weeks ahead. And these may be met with more favorable market sentiment.

Overall, after two years of solid gains in stock markets and low volatility during this period, we would expect to see moderation in returns and increased market volatility ahead. However, we continue to see positive economic growth and earnings growth. And while tariffs and trade remain uncertain, we don't see them pushing the economy into a downturn. And pro-growth policies may be coming next.

Thus, we believe investors can use market pullbacks as opportunities to diversify, rebalance and add quality investments at better prices across stock and bond markets. In our view, diversification will be a key theme in the year ahead. By spreading your portfolio across a variety of asset classes, you can help avoid too much exposure to those that may be underperforming, while potentially taking advantage of others that may be outperforming. These could include investments in both large cap and mid-cap stocks, investment grade bonds, and across growth and value sectors.

Finally, we recommend connecting with your financial advisor to develop an investment strategy that is tailored to your long-term goals. And with that, I thank you and we'll see you right here next month for the Market Compass.

Hello, and welcome to our first Market Compass episode of 2025. The year has started with optimism about the outlook for the economy and corporate profits, but also with some uncertainty about interest rates and inflation. 

One notable move impacting performance early on is the rise in bond yields. The 10-year Treasury yield briefly touched 4.8%, a 14-month high, before subsiding after the encouraging December inflation data. 

In this episode, we share our thoughts on what’s driving bond yields higher and how much further they can go. We’ll also touch on the implications for portfolios. 

First, why are yields rising?

A mixture of good and bad news is driving this recent rise. On the positive side, the economy has been performing better than expected, and 2024’s theme of economic resilience appears poised to continue.

Whether we’re looking at solid job growth, robust consumer spending or improving business sentiment, all suggest the U.S. economy continues to chug along, a bright spot relative to other major economies. As a result, the Federal Reserve, which cut interest rates by one percentage point last year, is feeling no urgency to cut them further. 

The bad news comes from some reemerging inflation worries. Progress on that front has slowed over the past six months. Looking at the breakdown of the increase in the 10-year Treasury yield since September, about a third of it is explained by the rise in inflation expectations. 

And finally, there is some uncertainty about potential policies from the new administration and elevated government debt at a time when unemployment is historically low, which is an unusual combination. 

Because of these three reasons — strong U.S. growth, lingering inflation pressures and policy uncertainty — investors have meaningfully reduced their expectations for interest rate cuts this year. The bond market is now pricing in fewer than two rate cuts by the end of 2025, down from 10 in September. This is a big adjustment, but the pendulum may have moved too far.

Next, how much higher can yields go?

While predicting interest rates is notoriously difficult, without the Fed going back to hiking rates, we believe yields may have a hard time moving sustainably higher from here or exceeding the prior cycle peak of almost 5% reached at the end of 2023. 

To that end, history provides some comfort. Yields have tended to peak around the end of Fed rate hikes in every cycle going back 40 years. 

This was the case in the mid-1990s, which was the last time the Fed achieved a soft landing. The economy never weakened substantially, and the Fed cut rates only three times before a prolonged pause. During this time, the 10-year yield rose about 1.5%, which is similar to the recent increase, but it never returned to its prior peak. 

We do not see rate hikes on the horizon; in fact, we expect at least one rate cut from the Fed this year, with two a reasonable base case. Navigating the last mile of inflation to reach the 2% target is proving to be bumpy, but the inflation trend remains lower. Highlighting this point, December’s CPI data were encouraging, with core inflation posting its first drop since July. 

The key takeaway is that the bond selloff might have gone too far. With the fed funds rate at 4.5%, which is still comfortably above the inflation rate of around 3%, Fed officials have room to cut at a slow pace.

And finally, what does this mean for your portfolio?

Higher rates have triggered some volatility for both stocks and bonds, but this is a familiar dynamic as we think about how markets have progressed over the last couple of years. 

Back in the summer of 2023, the 10-year Treasury yield briefly exceeded 4.5%, leading to a 10% pullback in the S&P 500. It crossed 4.5% again in April of last year, with stocks briefly declining 5%. In both cases, the bull market stayed intact, supported by solid fundamentals.

We think this will be the case this time as well. We see the economic expansion continuing, the labor market stabilizing at healthy levels, and earnings growth accelerating. While it is still early, the earnings season that kicked off with the banks in mid-January is sending a positive signal about the health of corporate America. For the fourth quarter, S&P 500 earnings are expected to increase 11%, which would be the strongest growth in three years. 

Additionally, the silver lining behind the volatility of December and early January is that it helped unwind some investor sentiment extremes. In October, twice as many investors surveyed anticipated market increases rather than declines, while the same ratio of bulls to bears is now slightly under one, indicating more balanced sentiment. 

Even though the Fed’s path and the new administration’s policies are somewhat uncertain, we think this reset in expectations paves the way for the next leg higher in stocks. 

On the fixed-income side, consider using the rally in yields as an opportunity to review your allocations to cash investments and possibly reposition to intermediate investment-grade bonds. These bonds now carry higher yields than those of CDs and money market funds. The best predictor of future returns of high-quality bonds tends to be their starting yields, which are currently near a 20-year high. 

To sum up, volatility might be elevated this year, but we recommend using any pullbacks as opportunities to deploy fresh capital and rebalance portfolios aligned with your risk tolerance and long-term goals. 

For more market insights and strategies to consider that may be appropriate for you, contact your Edward Jones financial advisor.

Hello, everyone, and welcome to the December Market Compass, the final compass video for 2024. In this episode, we'll highlight four of our key views from our outlook for 2025. Now, in 2024, the financial markets and economy held up remarkably well despite uncertainty around the economy, elevated interest rates, and the US presidential election. US economic growth remained above trend. Households continued to spend. Inflation rates moderated, and that S&P 500 gained more than 20% for the second consecutive year.

Now, as we look to 2025, we see much of this positive economic momentum continuing, although the pace of economic growth and US stock market gains may cool. We do expect US economic growth to moderate but remain positive, supported by a healthy consumer and resilient labor market. In our view, these solid fundamentals also underpin ongoing US stock market returns, albeit perhaps with more bouts of volatility and more modest gains ahead.

Looking ahead to 2025, we believe the US economy will continue to see positive economic momentum. Consumption in the US held up well in 2024, despite inflation rates above the Fed's target and elevated borrowing costs.

Now, we expect conditions for US households to improve somewhat in the year ahead as the Fed continues to cut rates, albeit perhaps just two or three times in 2025, and inflation continues to moderate and remain contained. Wage growth should also remain above inflation rates, which means consumers can continue to benefit from positive real wages.

So while economic growth could cool a bit in the first half of the year, perhaps to 1 and 1/2% to 2%, we do not expect a downturn or recession. And notably, we do see the potential for US GDP growth to reaccelerate toward the back half of 2025.

Two key reasons could drive this. First, the lower federal funds rate, even if marginally below current levels, should flow through to the real economy by the end of 2025, supporting household and corporate consumption. And second, proposed pro-growth policies, including deregulation and tax cuts, should start to take shape by year end and could also drive consumption as well as positive sentiment in financial markets.

Now, these may be offset by uncertainty around tariffs and trade wars, but we do see this risk contained more to specific industries and global peers. Now, it should not outweigh the broader pro-growth impulses we may see by year end 2025.

The second key view we'll highlight is that we believe the Fed will continue its rate cutting cycle in 2025 to gradually remove its restriction on the economy. With the Fed funds rate now around 4.5%, well above inflation rates of about 2.5%. we believe there is room to bring rates down to a less restrictive policy stance, with policy rates likely settling in the 3 and 1/2% to 4% range.

In general, a neutral Fed funds rate tends to be about 1% above inflation rates. So if we see inflation settling in the 2% to 3% range, this implies that Fed rate cuts should head towards 3.5%.

Keep in mind, though, that there are uncertainties that the Fed will have to navigate. Pro-growth policies and inflationary pressures could cause the Fed to cut rates less than expected, and any deterioration to growth or consumption driven by tariffs could bring the Fed to cut rates more than expected. Overall, though, 2025 is likely to bring a lower interest rate backdrop for consumers and corporations, which should support the ongoing economic expansion.

So after two years of 20%-plus gains in the S&P 500, how do we see 2025 playing out in stock markets? Well, we do expect more bouts of volatility but positive, albeit moderating, gains driven by earnings growth more so than valuation expansion. We also see the scope for market leadership to continue to broaden beyond US mega-cap technology stocks in 2025.

Now, of course, US mega-cap technology stocks have seen strong performance over the past two years, driven by enthusiasm around AI and robust profit growth. But looking ahead to 2025, we believe opportunities are emerging in the cyclical and value-style investments that could lead to broader leadership in the year ahead, and those are for a couple of key reasons.

First, profit growth is expected to be strong not only in mega-cap tech but in cyclical and value style stocks as well. Value-style stocks typically generate nearly 70% of their revenues domestically, versus around 50% for growth style stocks, and a higher share of revenue from domestic sources could make value stocks less sensitive to uncertainty around areas like trade policy.

Domestic stocks may also benefit from that deregulation and those pro-growth policies from the incoming administration. In our view, this creates a favorable backdrop for broad participation in equity markets over the coming year, potentially rewarding those with well-balanced portfolios.

Finally, the last view we'll highlight is that we see bonds outperforming cash in 2025. Now, in 2024, cash outperformed US investment grade bonds for the third time in the past four years, driven by higher relative yields. However, we do see this trend reversing in 2025 as cash yields have now fallen below bond yields after the Fed has cut interest rates. Many investors have gravitated towards cash and cash-like instruments over the last year, such as money market funds and CDs, as these investments have offered favorable yields.

However, while cash can provide important benefits, holding too much cash or cash-like investments can present risks, such as the potential for lower returns over the long term. For example, since 1981, cash has generated annualized returns of 4.1% compared with 6.8% for US investment-grade bonds. More broadly, 2025 may be a good time to start thinking about moving those cash-like investments to investment grade bonds, especially if you hold outsized cash positions.

Overall, 2025 is poised to continue to be a solid year for investors. We believe the economy continues to grow, the Fed continues to cut rates, and there are opportunities in both stocks and bonds. It's also a good time to connect with your financial advisor to help ensure your portfolios are positioned for success in the new year.

Now, for a full look at our 2025 annual outlook, head to edwardjones.com. Happy holidays, everyone. And we will see you right back here for the next Market Compass in 2025.