Columbus Wealth Management Quarterly Update – 2025 Q1

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Market Update & Investment Commentary

Data as of 3/31/2025 (unless stated otherwise)

US Markets

We begin with a chart displaying the returns of major asset classes below. US small-cap equities have declined by nearly 9% year-to-date, while the S&P 500 has recorded a return of -4.25%. Mid-cap equities are positioned between these two benchmarks. Bonds have appreciated by approximately 2.7%, and for comparison purposes, international equities have increased by about 8.1% (further details on these will be provided in the next section).

It is important to understand the importance between a drawdown and a periodic return. As can be seen from the next chart below, the S&P 500 reached a high on February 19th, at which point the year-to-date return was +4.62%. It then reached a low on March 12th, when the year-to-date return became -5.88%. Therefore, the drawdown (measuring from the most recent peak to the subsequent trough) was about 10.5%, which was labeled a “market correction” because it exceeded 10%. However, the year-to-date periodic return at that time was -5.88%, and the benchmark went on to end the quarter at -4.25%. Naturally, we tend to hear about the more dramatic of these two methods of measuring return in the financial news, which can cause us to perceive the situation to be a bit worse than it actually is.  

Further, intra-year declines of 10% or more are actually not uncommon, occurring in 6 of the last 10 years. This includes a 25% drop in 2022 (interest rate hikes) and a 34% drop in 2020 (onset of COVID). It’s easy to put more emphasis on recent events and less on those that occurred a while back, but the chart below from J.P. Morgan’s Guide to the Markets reminds us that “corrections” really are just a normal part of investing.

The top seven stocks in the S&P 500 (Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla) have collectively decreased by 14.8% in the first quarter.  With those having a weight of 35% in the index, that means they’ve contributed to more than 100% of the decline in the S&P 500 so far this year. Just as the rapid rise in these securities have contributed to recent market growth, it’s no surprise that they were the hardest-hit when the correction took place. Consequently, our portfolios are designed with diversified strategies to mitigate this concentration risk. As can be seen in the next chart, value securities (as measured by the Russell 1000 Value Index) were up about 2.1% in Q1, whereas growth securities (Russell 1000 Growth Index) were down about 10%. Our portfolios also incorporate a slight tilt towards value investments.

US Large Cap Equities, represented by the S&P 500, constitute only one element of a well-diversified portfolio. The subsequent chart compares the performance of the S&P 500, which declined by 4.25% in the first quarter, with that of a more balanced portfolio comprising 70% equities and 30% bonds, which increased by 0.17% over the same period. The equities used in this example are measured by the MSCI All-Cap World Index, encompassing both US and non-US equities, while the bonds are assessed using the Bloomberg US Aggregate Bond Index. Utilizing a long-term strategic asset allocation strategy to construct a balanced portfolio serves as our primary defense against market downturns.

International Markets

We also know the importance of having international securities as part of a balanced portfolio. While international equities have underperformed US equities in most recent time periods, they’ve had a very good start to the year. Below, we provide a chart showing developed markets (MSCI EAFE) up 8.1%, and emerging markets (MSCI Emerging Markets) up 4.5%. We’ve also listed returns for Europe, the UK, and Japan benchmarks, which make up about 87% of the EAFE, as well as China, which makes up about 31% of the MSCI EM index. A weakening dollar has also enhanced returns for US investors in non-US equities. As we mentioned in our last quarterly update, international valuations are still attractive relative to US equities, and having broad diversification across markets outside of the US can help reduce overall risk, particularly during times when we are seeing big policy shifts at home.  

Economy

The most recent unemployment rate in February was reported at 4.1%, which remains significantly below the 60-year average of 6.1%. There has been no significant increase in layoffs or resignations. Payroll gains amounted to 151,000 as of the last report, with a three-month average of 200,000. Federal layoffs are projected to be approximately 300,000 for the year, equating to about 10% of the federal workforce, or roughly two months of average payroll gains. This is likely insufficient to cause a major issue on its own.

Inflation, measured by the Consumer Price Index (CPI), has decreased to 2.8%, approaching the Federal Reserve's target of 2%. The impact of tariffs remains to be seen, and housing continues to be the largest contributor to inflation. The current Target Federal Funds rate stands at 4.25% - 4.5%, with additional cuts anticipated this year, though this is of course subject to change as things unfold throughout the year.

Sources: Bureau of Labor Statistics, Federal Reserve

Increased tariffs tend to be inflationary, particularly in the short-term.  If higher tariffs persist rather than be used as a short-term negotiation tactic for other policy goals, there is a concern that increased prices could lead to reduced consumer spending, which makes up about two-thirds of GDP, potentially resulting in lower economic growth. This situation could theoretically trigger a recession, especially if accompanied by rising unemployment.

Conversely, if tariffs are used strategically to negotiate better trade deals, this could ultimately benefit the economy by fostering growth and innovation within the country. While higher prices may impact consumer spending in the short term, this could be a catalyst for increased production and job creation domestically. Additionally, with the Federal Reserve's cautious approach to interest rates, there remains flexibility to provide monetary stimulus if necessary. Though there is uncertainty surrounding long-term trade policy, the potential for positive economic outcomes from strategic tariff implementation should not be overlooked. There is also the potential extension of the Tax Cuts and Jobs Act, which could offer fiscal stimulus that might counteract part of the cost of tariffs, thereby contributing to maintaining healthy levels of consumer and business spending.

Summary

Markets have historically adapted to policy changes over time. During President Trump's first term, concerns about tariffs and trade wars caused market volatility. However, markets generally performed quite well, especially once trade agreements were reached. Recognizing that the present market fluctuations are influenced by policy uncertainty rather than genuine economic weakness can assist in contextualizing the recent volatility. The scenario often improves once the uncertainty is resolved, and definitive policies are enacted.

Market corrections are a normal part of long-term cycles, serving to reset valuations and create opportunities for disciplined investors. Although past performance does not guarantee future results, markets often recover unexpectedly, making the timing of exiting and re-entering the market with success nearly impossible. For example, the market recovered in five months after the 2020 correction, and in about a year after the 2022 losses. The psychological challenge of staying invested during corrections is one reason many investors, without proper guidance, may underperform broad market indices over time. That’s why we prefer to focus on behavior and a long-term strategy, rather than predicting short-term market movements. By doing so, we can stay focused on long-term goals and avoid locking in temporary losses. We wrap up with a final chart from JPM showing the impact of missing the best days in the market. As always, we are available to discuss any questions or concerns you may have!

Important Disclosure Information:

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Columbus Wealth Management, [“CWM”]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CWM. CWM is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of our current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.cbuswm.com. Please Remember: If you are a CWM client, please contact CWM, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please also remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your CWM account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your CWM accounts; and, (3) a description of each comparative benchmark/index is available upon request.