Hi there – 

The markets are on the brink of a correction as of this writing, which is defined as a 10-20% pullback. They have certainly been giving us plenty to consider lately, and I wanted to share our team's latest analysis and upcoming strategic adjustments. Despite headline-driven volatility, we're finding encouraging signs of economic resilience and opportunities for investors.

This month's newsletter outlines our current economic perspective, explains some of our tactical portfolio adjustments, and provides important tax filing reminders with April 15th just around the corner. Our focus continues to be on aligning your investment strategy with your long-term financial goals, understanding that volatility will always be a part of achieving those objectives.

I'm always available to discuss how these insights apply to your specific situation – just give us a call.

Best,
Joel

Economic & Market Summary: Q1 2025

Below please find our latest perspective on market conditions and portfolio positioning strategies. This update reflects our ongoing analysis of economic trends and opportunities as we navigate the investment landscape.

Market Trends & Economic Indicators

Recalibrating Expectations While Maintaining Optimism

As mentioned above, a market correction is typically defined as a pullback of 10-20%. These corrections occur with relative frequency - historically averaging a bit less than once per year in the S&P 500, and are considered a normal part of market cycles. It is important to note that while the fundamental economic picture remains largely unchanged, market uncertainty has increased due to current and potential future tariff implementation. In light of this, consider the following:

• Mega-cap stocks continue to experience substantially stronger earnings growth compared to the broader market.
• Despite occasional market turbulence from headline risks, the broader economic picture continues to show resilience. Economic fundamentals remain solid, with corporate earnings growing 11.7% in Q4 2024. Labor markets continue to show strength, with unemployment holding steady at 4% - a historically low level. Meanwhile, inflation has moderated to below historic averages, though it remains slightly above the Federal Reserve's target.
• Investor reactions to earnings have become more demanding - companies that beat expectations see more modest price appreciation while those that miss face steeper declines.

• Analysts have begun revising 2025 earnings estimates downward, potentially creating a lower hurdle for future positive surprises. Current expectations are for Q1 2025 earnings between 7.3% and 9.9%, which would remain a very healthy level. 

Portfolio Strategy Updates

Tempering Bullishness While Maintaining Direction

• We are moderating our equity overweight position, maintaining a preference for stocks over bonds while adjusting our risk exposure.

• Despite some broadening in market participation, we are increasing our allocation to U.S. equities relative to international developed markets.

• We continue to favor large, high-quality U.S. companies with stronger relative earnings, particularly in the mega-cap segment.

Fixed Income Approach

• Our strategy includes shortening duration positioning within U.S. treasuries to reduce volatility.

• This adjustment aims to capture similar term premiums and yields but with less volatility, given the relatively flat yield curve at longer maturities.

• Overall fixed income levels remain largely unchanged as we fund other strategic adjustments.

Alternative Assets Strategy

• We have increased our allocation to gold, funded from fixed income allocations.

• This position is supported by continued strong demand from central banks, particularly from countries diversifying their reserves.

• Gold traditionally performs well during periods of rate reductions and may serve as a hedge against potential global trade disruptions.

Looking Forward

Navigating Policy and Market Uncertainty

• Tariff concerns have become a significant focus in corporate boardrooms again, with a substantial increase in mentions during quarterly earnings calls.

• While tariff concerns create uncertainty, our analysis suggests potential for a "relief trade" if implemented policies are less severe than current market fears anticipate.
• Larger companies appear better positioned to navigate potential trade disruptions than smaller, domestically-focused businesses.

Market Perspective

• Despite the strong performance of the last two years, the market returns over the three-year period suggest stocks are still reasonably valued given the 2022 bear market.

• This indicates we may not be running ahead of fundamentals as some might fear.

• The recent market volatility may not be indicative of a recession or bear market, though we anticipate continued day-to-day headline risk.

• It is important to keep in mind that during a business cycle we anticipate periods of contraction which have historically been followed by new periods of expansion.

As always, we maintain our discipline of balancing near-term market conditions with your long-term financial objectives. While making tactical adjustments to capitalize on current opportunities, we remain committed to a strategic approach aligned with your personal financial goals. Please don't hesitate to reach out with any questions about these market developments or your overall financial strategy.

Source: BlackRock, Bloomberg. Metrics, rationale, and levels of concern are determined by iShares Investment Strategy research and analytics. Level of concern is generally determined using historical recession levels, on average. For illustrative purposes only. As of February 2025.

Tax Day: April 15, 2025

As tax day approaches, here are some reminders to help you navigate the filing process:

• Finding Your Schwab Tax Documents: Your 1099 forms (including 1099B, DIV, INT), summaries of realized gains/losses for non-qualified accounts, and 1099R forms for retirement distributions are all accessible through Schwab and Orion via our Client Login page and the Certus Wealth Management app. Need help logging in? Just email us at info@certuswealthmanagement.com.
• Consider IRA or Roth IRA Contributions: If your tax advisor suggests making an IRA or Roth IRA contribution, let us know right away. This move could lower your tax bill or provide tax-free growth while putting more money toward your long-term financial independence.
• Special Note for Business Owners: If you run your own business, you might benefit from the higher contribution limits offered by SEP-IRAs or individual 401(k)s. These plans may let you save more for retirement while keeping paperwork to a minimum.

At CWM, we are committed to working hand-in-hand with your CPA or tax professional. By bringing us together with your tax advisor, we can create more powerful strategies to move you toward your financial goals.

Certus Wealth Management