IS THIS AN ECONOMIC ECLIPSE?: UNCERTAINTY, VOLATILITY & THE SEARCH FOR CLARITY
Q1 IN A WORD? EXFUSION MARKED BY EXHAUSION, CONFUSION & UNCERTAINTY
THE STOCK MARKET: HIGH HOPES, HARD LANDINGS, MANY QUESTIONS
SPECIAL REPORT: WHY THE YIELD CURVE MAY BE A WINDOW TO WHAT’S NEXT
JOHN NORRIS Chief Economist
DAVID MCGRATH, CFA Managing Director Associate Managing Director
If you only had one word to best explain the 1st quarter of 2025, it would probably either be exhausting or confusing. Perhaps it would be a combination of the two. Exfusing has a certain ring to it. Who knows? Exfuse could be the verb, and exfusion might work as a noun.
The only certainty after 1st quarter is that it is finally over.
How else would you describe the first three months of 2025? What with the administration disrupting business as usual in Washington and pushing back on globalization? It was even more action-packed than promised.
Unfortunately, investors usually tend to prefer certainty over political upheaval. While there has always been money to be made in volatility, it remains to be seen just how much there is under upturned apple carts. As such, after a solid start to the year in January, the markets posted a lot of red ink during February and March.
After two consecutive calendar years of relatively easy money, the threats of global tariffs and the ease with which DOGE was able to uncover potential cost savings had a negative impact on both consumer and business sentiment, especially the former. However, it remains to be seen just how much of an impact this loss of confidence had on actual economic activity.
The initial read suggests the U.S. economy likely contracted during the 1st quarter. While consumer spending slowed, much of the decline stems from a significant deterioration in our trade deficit, as businesses rushed to stock up on their imports prior to any tariffs taking effect. Fortunately, this type of short-term decline on the Gross Domestic Product (GDP) equation tends to self-correct when imports decrease over subsequent quarters.
Much of that will depend on the labor markets and inflation data. If the economy keeps creating jobs at the same pace it has over the past three years, it is unlikely that inflation will fall rapidly enough for the Federal Reserve to meaningfully cut the overnight rate. This will keep the cost of capital relatively high, which will put somewhat of a ceiling on overall output.
The inverse is also true. Inflation will start to moderate more substantially if job growth starts to cool. At this time, this is the most probable scenario, which means the Federal Reserve will likely resume cutting rates in the not-so-distant future. This should help to alleviate a more significant economic slowdown.
In the end, again, it was an exfusing quarter. What is going to happen with tariffs? DOGE? The Federal Reserve? Job creation? Inflation? GDP? The markets? Yeah, I think it is safe to say most people are happy the 1st quarter of 2025 is over. That much is certain.
Finally.
Thank you for your continued support,
John Norris Chief Economist & Chief Investment Officer
Our Investment Committee distributes information on a regular basis to better inform our clients about pending investment decisions, the current state of the economy and our forecasts for the economy and financial markets. Oakworth Capital currently advises on approximately $2.2 billion in client assets. The allocation breakdown is in the chart below.
Stark contradiction ruled the start of 2025 – resilient economic data stood in contrast to declining consumer sentiment, surging gold prices, volatile markets and looming tariffs. From tech turbulence to DOGE-driven fiscal restraint, uncertainty continues to define our current economy.
It doesn’t matter whether you find the Trump administration’s frenzied base to be either infuriating or invigorating. One thing’s for certain — it isn’t boring.
Trump administration officials have been brutally honest in their assessment of U.S. allies — much to the latter’s extreme displeasure. Interestingly, this public candor seems to have produced more results in a shorter period than have decades of “behind closed doors” diplomacy ever did.
Everyone knows the markets don’t like uncertainty. They really don’t like the uncertainty of what tariffs could mean for an increasingly exhausted U.S. consumer.
During the 1st quarter of 2025, Americans found out you don’t have to be an elected official to be prime minister of Canada. The new prime minister, Mark Carney, had never held an elected office prior to holding the highest political position in the country. Who knew this was even possible?
The quickest way to get peoples’ attention? Turn off the federal funding spigot. Elon Musk’s Department of Government Efficiency (DOGE) did just that in the 1st quarter, quickly uncovering a surprising amount of, shall we say, curious spending in Washington in a very short period.
Naturally occurring wildfires can get deadly and be very expensive when people live “cheek by jowl” in extremely arid, windy areas. Things can get even uglier when humans are to blame for the fires.
What Americans are saying about the economy and what they are doing seem to be two different things. Consumer confidence has fallen dramatically since the end of October. However, the actual economic data has been surprisingly resilient, decent even. At some point, something will have to give.
If you owned a lot of technology stocks in your investment portfolio, you absolutely loved 2023 and 2024. However, the 1st quarter of 2025 was a sharp reminder that whatever goes up must come down.
International stocks had a terrific quarter, especially European ones. However, it is far from certain whether investors actually like Europe or whether they were simply rebalancing their portfolios after years of outsized returns in the U.S.
For a number of reasons, central banks around the world have significantly added to their gold positions over the past several years. Retail investors finally took notice and have been gobbling up gold funds and bullion in response. As a result, the price of gold has soared to all-time highs. Not bad for a shiny hunk of metal that doesn’t pay interest or a dividend and doesn’t generate any revenue.
The Federal Reserve seems to be as confused as everyone else when it comes to both inflation and the labor markets. Comments from Fed officials make it pretty apparent they are increasingly content letting conditions “play out” a little before making any major changes to monetary policy. That is probably a good thing.
The DOGE’s spending and job cuts will have a negative short-term impact on the economy — there is no way around it. Most people can appreciate the necessity of getting Federal spending under control, but no one’s happy when it’s their job, contract or budget on the chopping block.
While the Federal Reserve doesn’t officially set long-term interest rates, it will significantly influence them moving forward by manipulating the size of its balance sheet. It has already done so in 2025 by effectively ending its “quantitative tightening” program.
By the end of the first quarter, all investors wanted was a stiff drink — a fitting reaction to an economy now positioned for sluggish growth through the second quarter of 2025.
John Norris
At the start of 2025, investors just wanted to know what the U.S. economy and stock markets could do for an encore after 2024’s surprising strength. By the end of the 1st quarter, all they wanted was either a Xanax or a stiff drink.
Let’s just say the first 3 months of the year were perplexing.
• At the end of March, investors still didn’t have a good handle on the true strength of the labor markets. After all, the official data from the Bureau of Labor Statistics (BLS) has been a little peculiar over the past 18-24 months.
• Also, despite the Federal Reserve’s best efforts, sluggish money
supply growth and tepid loan demand, the official inflation gauges have remained stubbornly high.
• Throw in the new administration’s nearly frenetic behavior, and few could tell you exactly what was happening with any confidence.
What impact would Washington’s repeated tariff threats on the United States’ leading trade partners mean for the average U.S. consumer? What would they mean for domestic manufacturers, given the globalized nature of the economy? How would they impact inflation and corporate profitability? Did President Trump mean for them to be permanent? Or were they meant to be temporary in order to influence a certain type of behavior?
On top of this, the Department of Government Efficiency (DOGE) hit the ground running in a big way. Headed by Elon Musk, DOGE was able to uncover a large number of instances of government waste and questionable spending. At first, the headlines from the group were arguably invigorating. Unfortunately, by the end of the quarter, the ease with which DOGE could expose Washington’s inefficiencies was almost numbing.
Just how bloated had the Federal government become? Even more, how many redundant or nonessential jobs would DOGE eliminate, or propose to eliminate? How many contracts would it terminate? Subscriptions? Travel plans? Commercial leases? Vehicle leases? Cell phones? Duplicating systems?
Trimming the Federal budget is necessary to ensure the government will be able to function effectively in the future.
The ease with which DOGE has identified cost savings suggests there is still too much money sloshing through the U.S. economy. Draining it will be a painful process.
After all, a redundant job is still a job. That person has a paycheck with which they purchase goods and services. A questionable contract provides revenue for the company on the other side. The list goes on and on.
All of that money, whether the government is spending it wisely or not, is still ending up in the economy in some form or fashion. Obviously, this is beneficial in the short term, even if it is long-term foolish.
Not surprisingly, with everything happening in the world —and at such a rapid pace — the U.S. consumer grew increasingly concerned as the quarter progressed. Intuitively, that doesn’t always bode well for economic growth.
Source: Bloomberg Financial
Unfortunately, investors can’t control what the president or DOGE is going to do next.
• They don’t know which country will be the next to draw the short straw when it comes to tariffs.
• They have no idea just how much money Elon Musk is going to save.
• No one knows the next steps when it comes to Greenland, the Panama Canal, ending the war in Ukraine or whether Vice President Vance will even be allowed in Germany again after his speech in Munich.
What they can do, however, is analyze the economic data that Washington continues to provide in order to determine what they should do next in their portfolios. As is almost always the case, they want to know what is going to happen to consumer prices and the consumer itself. If they can figure that out, they can better predict the Federal Reserve’s next move.
Basically, everyone is trying to pinpoint when the next rate cut will be. More than that, they want to know just how many cuts the Fed has remaining in this easing cycle and when it will be finished. IF they can ascertain these things, they can either make a lot of money OR save it.
So, what is going to happen with both inflation and the U.S. consumer?
As everyone reading this magazine undoubtedly knows, consumer spending makes up over two-thirds of the Gross Domestic Product (GDP) equation for the United States. Therefore, how goes the U.S. consumer is how goes the U.S. economy. Since a paycheck is the single biggest source of income for most American households, it is fair to say how goes the U.S. job market is how goes the U.S. consumer.
THE
As such, you can’t talk about the U.S. economy without talking about the U.S. labor markets. If this seems a little circular, it is. This is the reason it ordinarily takes some form of shock or exogenous event for the economy to go into a deep recession.
After all, as long as the economy is creating jobs, it is creating paychecks. As long as it is creating paychecks, it is creating consumers. As long as it is creating consumers, it facilitates additional spending. As long as this happens, the economy continues to grow. Essentially, in this scenario, growth begets growth, to a point.
This is the reason “U.S. personal consumption expenditures chained dollars year-over-year” have only been negative 4 years since 1960 (note: chained dollars = inflation-adjusted dollars). The most recent two were in 2008 and 2020. In short, the only things that have been severe enough to derail the U.S. consumer since 1990 were a financial system collapse in 2008 and a global pandemic in 2020.
Source: Bloomberg Financial
Even so, official job growth since the pandemic’s lowest point has been pretty strong, almost surprisingly strong. Just how long can U.S. employers keep adding to their payrolls at the same pace or to the same extent? Even more so since borrowing costs, and therefore debt service, are as high now as they were at the end of 2007.
Great question— and one that would suggest a likely slowdown in hiring in the months ahead. This doesn’t mean businesses will start cutting jobs. It simply means they likely won’t be creating as many of them as they have been. That is simply what happens when “tighter money” starts to impact the income statement.
Since December 1959, the median monthly payroll growth in the United States has been 176K. As such, monthly job gains in excess of that number might imply faster-than-average economic activity. Obviously, the inverse is also true.
Due to where “we” are in this economic life cycle, coupled with the Fed’s relatively restrictive monetary policy AND what promises to be tighter fiscal policy in Washington, it is hard to imagine the economy suddenly accelerating at this juncture. Therefore, job growth moving forward in 2025 should average less than 176K per month. Voila.
How much less is the $64K Question.
At the end of the 1st quarter of 2025, the good-case scenario for payroll growth over the next month would be the above stated 783-month median of 176K. The bad-case scenario would be the upper bound of the 4th quartile of the observations, which is 61K. Smack dab in the middle, the 37.5 percentile, would be a change in monthly payrolls of 125K. For grins and comparisons, the monthly median has been 224.5K over the past 26 months.
More than likely, this type of cooling in the labor markets would result in a slowdown in consumer spending from 2024’s roughly 3.1% to around 1.5-2.0%, or thereabouts.
Since consumer expenditures make up, again, roughly two-thirds of the GDP equation, 1.5-2.0% is the starting point from which to make further predictions about the U.S. economy in the short term.
Keeping this in mind, and absent the potential impact of any tariffs or other trade restrictions, consumer prices should trend downward in this economic scenario. After all, prices are a function of supply and demand. If the economy is creating fewer jobs, it is creating fewer paychecks and, therefore, consumers. Fewer consumers, all other things being equal, means a decrease in aggregate amount. Unless supply slows in tandem with the decrease in consumer demand, prices should fall.
Source: Economics Online
When the supply of ingredients decreases but demand stays the same, prices go up. When supply remains constant, but demand decreases, prices fall.
That is simply the way it works. The way it has always worked, and the way it will work in the future.
Due to recent changes in immigration policy, it is highly likely that fewer people will enter the United States, in aggregate, over the next several years. Not only will this have the potential to depress prices at the grocery and the pump, but it could also serve to put a lid on rents and housing prices.
After all, according to most estimates, some 1.5-2.0 million people made their way into our country last year, and upwards of 8 million over the past 4 years. What if that annual number falls by, say, half? That’s roughly 1 million fewer folks looking for a place to put their head at night. That isn’t insignificant.
If fewer people are looking for Class C apartments, landlords will lower their rents in order to fill up their properties. Obviously, this will mean there will be an increase in supply of Class B units, and the owners there will also look to reduce prices. This, then, would create a little bit of a snowball effect, only going uphill.
To be sure, prices for homes in the more upscale sections of town might not ever get the message. However, as immigration slows due to recent changes in policy, there is no way there won’t be downward pressure on general housing prices. There will simply be fewer heads needing fewer beds.
When you consider the likely prospects for the consumer, inflation and the economy, the Federal Reserve will likely be in a position to be more aggressive in cutting the overnight rate by the end of 2025. Currently, the Fed is predicting it will make a total of 50 basis points (0.50%) in cuts by the end of December. In all probability, it will do more than that during this calendar year.
In summation, the U.S. economy is positioned for sluggish growth through the end of the 2 nd quarter of 2025. However, this does not mean there will be a sharp contraction. Absent an unforeseen shock to the system, there likely will not be.
Fortunately, we should end the year on a relative high note in terms of activity and enter 2026 with greater tailwinds than are currently present.
Our Investment Committee experts are responsible for overseeing the investment decisions on behalf of Oakworth Capital Bank. Their objective is to manage investment strategy, monitor the performance of all portfolios and conduct research to identify key opportunities.
Started over 20 years ago, Common Cents is a weekly blog written by Chief Economist John Norris detailing and explaining the events that impact our economy. John distills the latest information, making it easy to understand how these events affect daily life.
In this weekly podcast, Chief Economist John Norris and Portfolio Manager Sam Clement exchange perspectives on the driving factors influencing our economy. Trading Perspectives can be found on Apple Podcasts, Spotify, Google Play, YouTube, and all other major podcast outlets.
The yield curve offers valuable clues about where we are headed. Like the tip of an iceberg, it reflects a much larger, more complex set of economic forces that aren't immediately visible.
Ryan Bernal
Lately, headlines have been dominated by debates over fiscal and monetary policy, with speculation swirling about a potential economic slowdown and how the Federal Reserve might respond. Interest rates, inflation and government spending seem to be at the center of every financial discussion. But beyond the buzzwords, what do these shifts actually mean for the broader economy? A great starting point is to look at the yield curve, an important benchmark that reveals insights about the state of the economy.
Source: U.S. Treasury
A yield curve, more specifically the U.S. Treasury yield curve, is a line graph that shows the current yield of treasury instruments at different points in time. Investors can gather an abundance of different information from this chart, as it serves as an important benchmark for other debt in capital markets.
Some examples of this would be mortgage rates, corporate bonds and other key lending rates tied to the cost of borrowing money.
Beyond pricing other debts, the yield curve can be used to predict changes in the economic landscape and gives insight into expectation of growth over time
Shorter-term rates on the yield curve are more directly influenced by Fed policy. When the Fed moves rates, treasuries with a duration of two years or less generally have a much higher correlation with those changes. While there are other factors at play here, this generalization can help investors rationalize changes in the yield curve. Unfortunately, this straightforward explanation does not work for the longer end of the yield curve.
Longer-term rates on the yield curve are influenced by many different factors that drive movements in price and yield. This is important for investors, as it provides insight into market expectations for the economy over the long term. While these longer-term yields can still be affected by Fed rate changes, some of the most significant influences include inflation expectations, economic growth outlook, future interest rate expectations, Fed quantitative easing/tightening cycles, demand for treasuries and broader geopolitical circumstances. It’s a lot go digest!
When investors anticipate higher future inflation, they seek higher returns to compensate for the reduced purchasing power of their money over time.
• Treasury investors will then sell their holdings and seek other assets with greater risk premium to satisfy their needs.
• This will lead to yields rising as bond prices fall.
This can also happen inversely. If inflation expectations are lower in the future, investors will flock to bonds as a way to lock in steady returns, causing prices to rise and yields to fall. Economic outlook can also play an important role, when investors weigh the opportunity cost of owning a fixed income instrument during an economic boom, they are sacrificing returns from other asset classes (i.e., equity holdings). Alternatively, if the economy’s outlook is weak, investors will buy treasuries as a safe haven asset, causing yields to fall.
Last, and probably the most pertinent to our current backdrop, are the Fed’s quantitative easing and tightening cycles.
Quantitative easing is the process of the Fed using their monetary tools to increase the overall size of their balance sheet, usually in an effort to reduce interest rates and stimulate economic growth.
Quantitative tightening , by contrast, is the process by which the Federal Reserve aims to decrease the size of its balance sheet — often to reduce excess liquidity and combat inflation.
The Fed can implement quantitative tightening in a few ways, but the two most common methods are:
1. Selling government treasuries
2. Allowing existing holdings to mature without reinvesting in new bonds
INCREASE THE OVERALL SUPPLY OF TREASURIES IN THE MARKET AND LEAD TO LOWER PRICES AND HIGHER YIELDS.
Historically, there are many examples of when the Fed has used either quantitative easing or quantitative tightening to achieve their dual mandate – price stability and maximum employment.
That raises the question—how will this impact us in the current environment?
During and after the COVID pandemic, the money supply increased rapidly with government spending and subsidy programs, which caused inflationary pressure. This is most evident in the M2 money supply gauge, the Fed’s estimate of the total money supply, which increased somewhere around 25% in 2020 alone.
From the start of the pandemic to the end of the national emergency in April 2023, total M2 grew by a whopping 36%. That was an unprecedented amount of money entering the system, and with it came raging inflation.
Inflation, a lagging indicator, peaked at 6.8% in 2022. Before prices got out of control, the Fed jumped into action. They raised the overnight lending rate at a breakneck pace to fight inflation. This pushed yields higher across the board, with more pronounced movements on the short end of the yield curve. In May 2022, the Fed began shrinking its balance sheet by $30 billion per month, increasing to $60 billion after the first three months.
This had a significant impact on the yield curve, flooding the market with long-term treasuries and driving yields higher. The yield curve inverted, signaling investors’ worry over long-term economic conditions. Combined with other Federal Reserve monetary policies, this helped to cool inflation and drive up key interest rates.
Source: U.S. Treasury
This brings us to today, as the Fed begins shifting its approach. The most recent PCE reading of 2.5% is not quite at the Fed’s 2% target, but it is moving in the right direction.
At the same time, economic data is softening, with a slight uptick in unemployment and overall economic activity slowing down. In response, the Fed began its rate-cutting cycle in the second half of 2024, bringing down short-term yields. However, as noted, this has less effect on the long end of the curve. During this period, the yield curve began to un-invert: 3-month yields dropped sharply while the 10-year held steady.
Additionally, the Fed announced it would slow the pace of quantitative tightening, reducing the balance sheet runoff to $5 billion per month starting April 1, 2025. Meanwhile, the government was making payments from the Treasury General Account (TGA) to major banks—part
of regular government outflows during the debt ceiling standoff—which added liquidity to markets and kept a lid on 10-year yields. But with tax revenues coming in and a new debt resolution likely, money will soon flow back into the TGA, adding upward pressure to longer-term rates.
What does this mean going forward? Well, it’s likely that these pressures keep rates higher for longer across the board, but this could be especially true for the 10-year yield. Geopolitical influences have already resulted in increased volatility as investors flock to treasuries in this time of uncertainty, but sentiment about the long-term economic outlook is showing that the market expects this time of turmoil to be short lived. With so many key rates based on the 10-year yield, we can expect the cost of borrowing money to continue to be elevated. Higher rates impact consumers through more expensive mortgages and businesses by increasing financing costs. However, it’s worth noting that despite these pressures, the 10-year yield remains below its historical average. Before the 2008 financial crisis, it hadn’t been this low since the 1960s.
The yield curve remains a powerful tool for understanding market sentiment, predicting economic shifts and evaluating the cost of capital. While short-term rates are more directly influenced by the Fed, longer-term yields reflect a broader web of expectations, from inflation and growth to global uncertainty and fiscal policy. As monetary policy continues to evolve and the economy adapts, keeping an eye on the shape and movement of the yield curve can help investors, businesses and consumers alike make more informed financial decisions. In short, the yield curve doesn’t just reflect where we are—it offers valuable clues about where we’re headed.
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Gold matters. And its price is riding the pulse of the global economy.
Chris Cooper
As of March 28, 2025, gold has outpaced the S&P 500 by more than 32% over the past year! What is driving this spike for a metal that we love to look at, but offers no cash flow? After all, only about 1/10 of the amount of gold that is mined each year is used for technology and industrial purposes. So why the recent run-up in prices?
A lot of it has to do with the global uncertainty that’s been hanging over us – pandemic recovery, geopolitical chaos, stubborn inflation, and the Russia-Ukraine war. All of this has pushed investors and central banks to flock to gold as a safe haven, and that demand has sent gold prices soaring.
HOW DOES GOLD MOVE WHEN THE FED CHANGES RATES?
financial system (a process called Quantitative Easing, or QE), one could expect gold to generally increase in price. Lower interest rates and more liquidity usually lead to higher inflation expectations, and when the market is worried about inflation, gold is one of the first places cash is rotated into as a hedge. Hard asset prices tend to artificially rise when there is more money sloshing around in the system.
Quantitative Tightening: In contrast, when the Fed raises rates or starts pulling money out of the system (Quantitative Tightening, or QT), one could expect the price of gold to struggle. When monetary policymakers set the overnight lending rate higher, treasuries, bonds and other assets become more attractive, so demand for gold lessens. This situation played out for much of 2021 and into 2022 when it was clear that monetary conditions would soon tighten as inflation risks rose. The price of gold can be influenced by the U.S. Federal Reserve, and how it implements monetary policy.
Quantitative Easing: Generally speaking, when the Fed cuts the overnight lending rate or increases money supply throughout the
Surprisingly, gold has been moving in lockstep with the S&P 500 since the most recent bear-market-bottom in October 2022, even as interest rates continued to rise.
Is gold proving to be more than just a safe haven? Or is it the voice of reason while the stock market drifts further from reality?
Gold is typically seen as a refuge when stocks fall, but recent price action has challenged that view. Persistent inflation has only fueled the rally, presenting challenges for monetary policymakers around the globe. Despite the U.S. stock market hitting new highs recently, there’s still plenty of uncertainty lingering in markets. In the U.S., the Federal Reserve has raised interest rates to combat inflation, rattling investors’ nerves about the longer-term economic picture. Even as stocks have recovered, gold has also maintained a stable store of value amid longer-term uncertainty surrounding inflation.
500 ( ʌ SPPX) Total Return
In 2022, central banks bought more than 1,100 tonnes of gold —the highest in decades, according to the World Gold Council. Why? Simply put, they want something stable, something that we know the world only has so much of – a scarce resource. Central banks are always looking to protect their economies, and gold is an easy way to do that. It’s a proven hedge against inflation, a buffer against currency devaluation, and it helps diversify reserves. Countries like China, Russia and India have been big players in this gold rush, aiming to reduce their reliance on the U.S. dollar. By buying up gold, they’re building a buffer for themselves against global volatility.
30 YEARS OF
Between 1992 and 2022, central banks switched from being net sellers of gold to stockpiling it.
Tonnes
Central banks hold gold to:
Balance foreign exchange reserves
Hedge against fiat currencies Diversify portfolios
Amid high inflation and geopolitical uncertainty, central banks bought a record 1,136 tonnes of gold in 2022.
Central banks sold gold during the late 1990s amid generally good macroeconomic conditions and a prolonged dip in gold prices.
Data as of 31 December 2022.
Source: Metals Focus, Refinitiv GFMS, World Gold Council https://elements.visualcapitalist.com/charted-30-years-of-central-bank-gold-demand/
Emerging economies, including Russia, China, India and Turkey accounted for the bulk of central bank gold purchases since 2010.
Ultimately, the gold market’s major shift over the past decade can be attributed to central banks significantly increasing purchases driven by economic, geopolitical and strategic factors. The global economy has faced harsh challenges, such as the COVID-19 pandemic, which led to massive fiscal stimulus, soaring inflation and increased market volatility. In such an environment, gold acts as a safe-haven asset that preserves value during periods of uncertainty.
Central banks have turned to gold to safeguard their reserves from inflation’s erosive effects – something paper fiat can’t reliably do. Geopolitical tensions, particularly the Russia-Ukraine war, have further highlighted the risks associated with relying on fiat currencies and traditional financial systems. The war and subsequent sanctions have amplified concerns about the stability of global trade and financial systems, prompting central banks to strengthen their reserves by accumulating gold.
Meanwhile, BRICS countries (Brazil, Russia, India, China and South Africa) are actively working to shift the world away from the U.S. dollar as the world’s reserve currency, and demand for gold has only increased. If not the dollar, what other fiat currency is trustworthy enough to be THE world’s reserve currency? Therefore, many central banks have been increasing their gold reserves to reduce exposure to the dollar and safeguard against fluctuations in foreign exchange markets. These factors, combined with a period of low interest rates following the Great Financial Crisis and gold’s role as a global liquid asset, have driven central banks to buy gold at levels well above historical norms.
Bullish sentiment hit a staggering 99.8% according to the Consensus Inc. survey — enough for a contrarian to raise eyebrows. This could be ripe for a pullback, and although pullbacks might occur, overall, conditions remain strong. Central banks are likely to continue buying gold as they diversify away from the U.S. dollar. And with inflation still elevated, gold should continue to be a go-to hedge for investors looking to protect their wealth.
Bottom line: Gold’s role in the global financial system is stronger than ever, and its price will likely keep moving in sync with the broader economic picture. Whether it’s more purchases from central banks, inflation fears or geopolitical risks, gold’s staying power as a safe asset looks solid. As renowned investor and academic Marty Zweig once said, “the trend is your friend” — and right now, gold’s trend is certainly upward.
The stock market faces an unusual number of unknowns as we move into Q2, but markets tend to reward clarity —something we hope will emerge soon.
DAVID MCGRATH, CFA®
The extremely strong equity returns of the past two calendar years can be attributed to two main causes.
1. The persistent strength of the labor market allowed the consumer to continue to spend and drive corporate earnings higher.
2. The meteoric rise in value of the largest growth companies known as the Magnificent 7. These seven stocks, which include Apple, NVIDIA, Microsoft, Google, Amazon, Meta and Tesla, turned two very good years (2023 and 2024) into great years for equity investors.
The continued strength of these market catalysts was called into question by the end of 2025’s 1st quarter.
The first major change in the new year was the massive political shift in Washington on January 20, with the transfer of power to the Trump administration. Initially, the stock market was able to absorb the massive amounts of uncertainty, thanks to strong consumer spending and relentless gains from the Magnificent 7 stocks. As those two catalysts wore down, the concerns over tariffs, rising inflation numbers and a weary consumer were simply too much for investors.
On Monday, January 27, reports emerged that a Chinese company, DeepSeek, was able to develop an open-source reasoning model that outperformed OpenAI in several tests. It was reported that this AI model was developed in just a few months at the cost of around $6 million. Most believe that these claims were exaggerated, but it did add some uncertainty in the minds of investors. That day, NVIDIA lost around $600 billion in market value. To give you some perspective, the market cap of the big three auto makers (Ford, General Motors and Stellantis) has a combined market value of $120 billion.
Despite the DeepSeek headlines from January 27, a broad stock market rally continued with the S&P hitting a new all-time high on February 19. The tone shifted abruptly the morning of February 20, as Walmart reported its 4th quarter earnings. The popular company lowered its guidance for 2025 earnings and painted a much darker picture of the American consumer than expected, shaking investor confidence.
Nearly Every Company That Reported Earnings After Walmart Expressed Concern About The Remainder Of The Year. If Walmart Is Feeling It, So Is Everyone Else.
Walmart’s earnings questioned the strength of the consumer, while renewed tariff talks brought higher inflation fears back into the discussion. This raised fears that the Federal Reserve might not have the ability to reduce interest rates much further. Investors wanted to de-risk their portfolios, and the easiest and most effective way to do this was to trim back the biggest winners of the past two years. Yes, the Magnificent 7.
• During 2023 and 2024, the Magnificent 7 gained a staggering $12.05 trillion in market value.
• From January 27 to the end of the quarter, those same seven stocks lost $3.62 trillion in market value.
Some 30% of the historic gains from the last two years for these seven stocks evaporated in just nine weeks. Most of the decline in the S&P 500 as a whole this past quarter can be accounted for right here.
Make no mistake, the strong earnings of the Magnificent 7 have been a major contributor to corporate earnings growth in the S&P 500 these past few years. The growth in profit margins for this group of stocks has been historic. Many investors believe we have seen a peak in their ability to keep margins at such elevated levels.
The 1st quarter ended with negative returns across all domestic equity indices. The only positive return was provided by the main international index, the EAFE (Europe, Asia Far East) Index, with a 6.2% return. Even with lower valuations, the small- and mid-cap stocks struggled as recession risks grew throughout the1st quarter.
Looking at the performance of the 11 economic sectors showed the negative impact the largest growth stocks had on the overall performance.
Seven of the 11 economic sectors showed a positive performance for the quarter, and two showed just a small loss. The large declines in both the technology and consumer discretion sectors were simply too much for the S&P 500 to overcome. Five of the Magnificent 7 are housed in those two sectors.
The communication services sector provides a great example of what happened in the quarter.
Several of the largest stocks from this sector had very strong returns, including AT&T (+27% in the 1st quarter), T-Mobile (+22%) and Verizon (+16%). The problem? Google and Meta carry so much weight in the sector that Google’s negative performance overshadowed strong gains from other stocks.
Looking Forward
The stock market faces an unusual number of “unknowns” as we move into the 2nd quarter. Some of these questions include:
• Will the falling consumer confidence numbers lead employers to start trimming their workforce for the first time since the beginning of the COVID pandemic in 2020?
• What will happen with the pending tariff announcements from the White House in the first week of the new quarter?
• How will those tariffs affect the stubborn inflation numbers, and will the Federal Reserve have the ability/willingness to cut the Fed Funds two or three times this year, as the stock market currently has priced in?
• Will uncertainty about the remainder of the year force companies to bring down their earnings guidance as we kick off earnings season in mid-April? If so, how far down will they come?
• Will the Magnificent 7 be able to keep profitability at current lofty levels, or will some slowing of cap spending dampen profit margins moving forward?
The amount of volatility we have seen in daily trading the last few months is directly related to some of these unknowns. The silver lining? The stock market tends to rise as clarity emerges on the health of the consumer, the economy, and the Fed’s monetary policy response to the first two questions.
It may be too much to ask to have all these issues resolved by the end of this quarter, but I do believe it is fair to hope for a clearer picture in the second half of 2025 than the economic and political fog that we are navigating now.
The word so far for 2025? Flexibility.
Sam Clement
The 1st quarter of 2025 has been volatile to say the least. The mood and outlook are changing quite literally by the day, reflecting a mixture of global economic uncertainty, geopolitical risks and changing central bank policies. After a turbulent start to the decade — marked by inflationary pressures, supply chain disruptions and shifting consumer behavior — the unpredictability has only intensified after a brief reprieve in 2024.
Considering all of this, U.S. markets are seemingly reevaluating what they are willing to pay for future earnings and cash flows. Not only are tariffs and geopolitics a daily concern, but the
cracks we have seen in the strong consumer and economy have led us to do the same.
Markets began the year with cautious optimism toward an administration that historically has positioned themselves as “pro-business,” but ongoing geopolitical tensions and softer economic data have caused investors to approach the markets with caution. Stock prices have been volatile, particularly in growth sectors that now appear to be underperforming as investors question how much they are willing to pay for uncertain future earnings.
U.S. tech stocks (a.k.a. Magnificent 7) have experienced the unfortunate realities of a pendulum swing. As we have previously written about, the largest companies in the U.S. market — which undoubtedly led the way up — have also been what has led the way down so far this year. In fact, plenty of areas in the market are still up for the year, although it may not feel
that way given the real estate that these mega-cap names hold in people’s minds.
Like the pendulum that swung up in 2024, where if you didn’t own mega-cap tech you might not have done that well, that pendulum has swung the other way this time. In fact, many sectors, such as energy, healthcare, utilities and financials, are up on the year, some quite handsomely.
So far this year, we have continued to move the portfolio to a more conservative position with less exposure to large-cap tech and small cap. Both areas are known for higher beta, or more volatility, and our goal has remained consistent – to decrease
the overall volatility in the portfolio in anticipation of last year’s market doldrums dissipating and a return to more typical market swings. To date, these have been the right calls as both areas are what have led the way down.
International stocks have been one of the bigger surprises to start 2025. While we believe that the United States economy remains positioned better than G7 counterparts and emerging markets, international markets have responded in lock step to the weaker dollar, which boosts their earnings and subsequently their stocks. Whether this trend continues will likely depend on the relative actions of central banks, as well as United States political policies, which have led to more uncertainty being priced in.
Volatility, however, has not been exclusive to the equity markets. Wild swings in bond prices, while less exciting to the mainstream media, have been a massive contributor to the uneasiness that has been felt so far, and the reasons have been obvious. Trade wars and inflation have had an impact, but when you add uncertainty around the Federal Reserve, over $2 trillion in new debt each year and a murkier economic forecast — that’s a recipe for wild swings.
What sets treasury yields apart from equities is the flow through they have on the real economy. Almost every financial instrument is tied back to treasuries, either directly or indirectly.
• Rate cuts from the Fed impact everything from bank deposit rates to home equity lines of credit and credit card rates.
• The 10-year treasury rate impacts where mortgage rates will be and what valuation people are willing to pay for future equity earnings.
The year 2022 was a good reminder of what the risks can be, even for treasuries, as long duration treasuries were down over 30% that year! We view fixed income as a place to hit singles, not swing for the fences — our positioning has matched that philosophy. Given the continued risks and uncertainty in the bond markets, we maintain a short-duration fixed income portfolio with a high credit quality consisting of treasuries as well as short-term corporate bonds.
While credit spreads have by no means “exploded” (the amount of higher return investors require for riskier bonds), the risk remains to the upside there, so by no means do we want to stick our necks out. Again, with fixed-income we prefer repeatable singles.
While we have reduced the volatility in our portfolios, this should not be interpreted as a sign of doom and gloom. There is nothing in the tea leaves to suggest we are on the edge of a severe recession. However, as discussed in other parts of this magazine there is undoubtedly some sluggishness.
The lack of volatility in 2024 was great and we enjoyed it while it lasted, but this was never going to last forever. Scott Bessent, the new treasury secretary, even stated that what is abnormal is for markets to only go up. Without risk (also known as volatility), there are no excess returns.
A word that has stuck with us for 2025? Flexibility. We are not trying to fully get out of equities, or positioning for a significant contraction — history has told us that markets tend to go up. Instead, we are trying to create flexibility and optionality before we need it, similarly to how one thinks about insurance.
As always, we will continue to focus on what the future holds and how that forecast impacts our clients’ portfolios. While there are a lot of unknowns this year, there is still plenty to be optimistic about and our team will be laser-focused on capturing opportunities as they present themselves.
Rate cuts, cooling inflation, rising unemployment rates, ongoing deficits, continued volatility, bond market buffering and drive-thru drama top our Investment Committee’s list of predictions for the remainder of 2025.
• Regardless of who wins the Canadian national elections in late April, relations between the U.S. and its northern neighbor will be frostier than they have been in recent memory.
• At some point, negative consumer sentiment and the better-than-expected economic data will start to converge. Either the former starts to feel better about things or the latter starts to weaken. That or a combination of the two.
• By the end of the 2nd quarter of 2025, the Federal Reserve will have enough data to support more than 50 basis points (0.50%) worth of rate cuts for the year. Whether it does so will be a different story.
• Despite some noise from the administration’s tariffs, inflation starts to soften throughout the year. Unfortunately for the U.S. consumer, that doesn’t mean prices are going down. They just won’t be going up as fast.
• Thanks to job losses in the federal government, and the jobs that depend on them, the official unemployment rate starts to tick up by the end of the 2nd quarter. It won’t be disastrous. Just enough to make it apparent the labor market is softer than it was.
• Despite all the DOGE-related headlines, the Federal government will run a massive deficit during fiscal year 2025. Any cost savings Elon Musk and crew were/are able to find likely won’t be fully realized until the 2026 fiscal year.
• The European Union and the United Kingdom prove to be an impediment to a lasting ceasefire in Ukraine. So much so, Washington will seriously consider letting Europe deal with what is ultimately a European problem by itself.
• Gold will continue to shine throughout much of the year, as foreign central banks want an alternative to the U.S. dollar and the U.S. wants an alternative to everything else.
• Despite weaker economic activity, sluggish foreign currency inflows and persistent deficit spending will likely put upward pressure on longer-term interest rates. To counter this, the Federal Reserve will likely start, or threaten to start, another quantitative easing program to give “a bid” to the back end of the yield curve. That is a fancy way of saying the Fed will act as a backstop to the bond market.
• The strong performance international equities enjoyed during the 1st quarter will start to evaporate , as investors are reminded of the long-standing challenges: demographic headwinds, fiscal constraints, a burdensome regulatory environment and entrepreneurial sluggishness.
• Residential rental rates will start to show some signs of weakening. The administration’s crackdown on illegal immigration will leave fewer people looking for places to live. This will have a ripple effect throughout the country. However, it will be a slow process.
• The fast-food industry will suffer through a year of turmoil. Franchisees will spend more on kiosks and other forms of automation. They will close underperforming outlets, slash menu options and push back on company promotions. The U.S. consumer is changing its behavior, and the industry is going to have to change with it.
• U.S. stock markets will likely remain volatile throughout the 2nd quarter. Despite the 1st quarter pullback, overall valuations remain elevated by historical standards. Investors will need to see stronger earnings growth or more Fed rate cuts in order to take the markets significantly higher.
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This report does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. The public information contained in this report was obtained from sources and vendors deemed to be reliable, but it is not represented to be complete and its accuracy is not guaranteed.
The opinions expressed within this report are those of the Investment Committee of Oakworth Capital Bank as of the date of publication. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders and employees.
